Feb 6, 2008
Executives
Nick Kormeluk - Sr. VP, IR Brett White - CEO Kenneth J.
Kay - CFO Vance G. Maddocks - President, CB Richard Ellis Investors
Analysts
Jeff Kessler - Lehman Brothers Brandon Dobell - William, Blair & Company Will Marks - JMP Securities Jay Habermann - Goldman Sachs & Co.
Operator
Ladies and gentlemen, thank you for standing by and welcome to the CB Richard Ellis Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct the question-and-answer session and instructions will be given to you at that time. [Operator Instructions].
As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr.
Nick Kormeluk. Please go ahead.
Nick Kormeluk - Senior Vice President, Investor Relations
Thank you and welcome to CB Richard Ellis' fourth quarter and fiscal year 2007 earnings conference call. Last night, we issued a press release announcing our financial results.
This release is available on the homepage of our website, at www.cbre.com. This conference call is being webcast live and is available on the Investor Relations section of our website.
Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archived audio of the webcast, a transcript and a PDF version of the slide presentation will be posted on the website later today.
Please turn to the slide labeled forward-looking statements. Our presentation today contain statements that are forward-looking, within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our growth momentum in 2008, future operations, future expenses and future financial performance.
These statements should be considered as estimates only and actual results may vary ultimately... may ultimately differ from these estimates.
These forward-looking statements are reflective of the information we have on the day of this conference call and except to the extend required by applicable securities laws, CB Richard Ellis Group undertakes no obligation to update or publicly revise any of the forward-looking statements that we make today. For a detailed discussion of these forward-looking statements and risks and other factors that could cause results to differ, please refer to our fourth quarter earnings press release dated February 5, 2008 and filed on Form 8-K, our prior interim 2007 reports on Form 10-Q, and our current Annual Report on Form 10-K, all of which are filed with the SEC and available at the SEC's website at www.SEC.gov.
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 in the appendix of today's presentation.
Please turn to slide three. Our management team members participating today, include Brett White, our President and Chief Executive Officer; Ken Kay, our Senior Executive Vice President and Chief Financial Officer; and Vance Maddocks, President of CB Richard Ellis Investors.
With that, let me turn the call over to Brett.
Brett White - Chief Executive Officer
Thank you Nick and good morning everyone. Please turn to slide four of your deck.
While 2007 was an outstanding year for CB Richard Ellis, we've further extended our lead and strengthened our position as the largest, most diversified, globally capable commercial real estate services and management firm in the world. We are the leading firm in virtually all of the top 25 cities globally.
We are the number one firm in transactions, both leasing and sales; advisory, which is our consulting and valuation appraisal business; outsourcing, both fully-integrated property and facilities management work on behalf of the world's leading corporations and owner investors; and we are one of the world's leading real estate investment management companies with approximately $38 billion of assets under management. We continued to implement our strategy of pursuing both transformational and in-fill acquisitions with exceptional integration results.
The Trammell Crow Company acquisition exceeded even our own aggressive targets for integration success. Morale among our almost 25,000 employees is exceptionally high and attrition of key employees is virtually non-existent.
All of this led to a record 2007, highlighted on the next slide, and please turn to slide five on your deck. Total revenue for the year was $6 billion, up 50% from the prior year.
Excluding one-time items, net income for the year came to $497 million, which translates to adjusted earnings per share of $2.11, up 43% from last year. Normalized EBITDA was $970 million, an increase of 49% from the prior year.
Due to purchase accounting for the Trammell Crow acquisition, $61.6 million or approximately $0.16 per diluted share of Development Services gains were excluded from the P&L. These gains should be considered in ongoing operating results and they are part of our normal operations and we did receive the cash associated with these gains.
After completing the integration of Trammell Crow Company, we realized annualized net expense synergy savings of approximately $90 million, surpassing our original expectations of $65 million. And with, that let me now turn the call over to our Chief Financial Officer, Ken Kay to discuss the quarter and year in more detail.
Ken?
Kenneth J. Kay - Chief Financial Officer
Thanks Brett. Fourth quarter financial results are shown on slide number six.
For comparative purposes, we have included results from the fourth quarter of 2006 on both an actual and adjusted basis. As a reminder, the adjusted 2006 figures incorporate the operating results of Trammell Crow Company, prior to its acquisition on December 20, 2006.
We include these adjusted results, because we believe it provides a more meaningful way to view our company's performance. For the fourth quarter 2007, revenue is $1.8 billion up 9% from the year-ago quarter.
Positive factors contributing to revenue growth in the fourth quarter were stronger transaction activities in markets outside of the Americas, higher global outsourcing revenues, plus significant growth in Development Services business. These increases were partially offset by the timing of carried interest revenue recognitions in the Global Investment Management business.
As you will earlier in the year, the majority of this revenue for 2007 was already recognized by the fourth quarter, whereas in 2006 the fourth quarter carried interest revenue was more significant. Our Americas segment revenues came in essentially flat for the quarter, which is noteworthy given the turbulent state of the economy in credit markets.
We will cover Q4 revenue performance in more detail a little later in the call. As a percent of revenue, total cost of services for the fourth quarter was relatively consistent at 52.6% versus 52.1% in the prior-year quarter.
Operating expense totaled $639.4 million for the quarter, up 19% from the prior-year quarter, as a result of costs associated with the Trammell Crow Company acquisition, as well as increased payroll-related costs including bonuses, due to improved performance. These increases were partially offset by lower carried interest expense.
Equity income from unconsolidated subsidiaries was $28.8 million, up 15% from the prior-year quarter, due to higher equity income in Development Services as well as higher dispositions within selective funds in our Global Investment Management segment. Minority interest expense for the quarter was $2.1 million, down 88% from the prior-year quarter, due to lower minority interest expense within our Development Services segment.
Other income of $8.6 million in the prior year, was related to marking-to-market Trammell Crow Company's investment in Savills for the period December 20, 2006 through December 31, 2006. Gain on disposition of real estate increased by $18.3 million or 53%, primarily due to the exclusion of certain gains from Development Services activities in the current year, which cannot be recognized under purchase accounting rules.
After adjusting for one-time items, EBDITA for the quarter was $285.8 million, down 9% from the prior-year quarter and resulting in an EBITDA margin of 15.5%. The primary drivers for the reduction in the EBITDA were the aforementioned increased in operating expenses in the current year, as well as the impact of the exclusion of gains from the Development Services business in the current year due to purchase accounting, coupled with lower Global Investment Management net carried interest profit to the timing of revenue recognition.
Turning to slide number seven, you will see despite the fourth quarter that was impacted by the economy and Global Investment Management timing issues noted previously, full year 2007 performance was quite good. Highlights of the year include revenue growth of 20% and a normalized EBITDA increase of 28%.
EBITDA growth would have been 36% had the development gains that were impacted by purchasing accounting been included. Please turn to slide number eight.
This chart depicts the trend in our normalized EBITDA margin overtime and our normalized EBITDA margin target. For 2007 pro forma EBITDA margin includes the EBITDA from gains in the Development Services business that did not flow through the P&L in 2007, due to purchased accounting.
As you can see, margin growth has continued as we expected when taking into account all elements of our ongoing operating activities. Despite marketing conditions remaining more challenging in the near term, we still believe a target of 20% is achievable for our business.
Moving on, please turn to slide number nine. Excluding the mortgage brokerage warehouse facility and the Development Services' real estate loans with are non-recourse, our total debt was approximately $2 billion at year end 2007.
During 2007, we repaid $286 million of outstanding term loans. The Development Services business finances its projects which third party financing sources.
The majority of these real estate loans are recourse to the development projects but non-recourse to the company. As of December 31, 2007 the other debt category on our balance sheet included a non-recourse revolving credit line balance of $42.6 million, related to the Development Services business.
The outstanding balance of the real estate loans was approximately $466 million, of which only $7 million was recourse to the company. During the fourth quarter we announced and completed $635 million share repurchase program.
We used existing cash in our revolving credit facility for the repurchases. The total amount of shares repurchased was 28.8 million, at an average purchase price of $22.03 per share.
Our share count as of 12/31/07 was 202 million shares outstanding versus approximately 227 million shares outstanding at the end of 2006. The amount outstanding on the revolver at the end of 2007 was $227.1 million.
Our net debt-to-EBITDA ratio at December 31, 2007 was two times, as compared to 1.48 times at December 31, 2006. Our trailing 12-month interest coverage ratio was 7.15 times.
Our weighted average cost of debt was approximately 6.34% at December 31, 2007, down from 7% at December 31, 2006. Please turn to slide number ten.
Here we've illustrated our normalized internal cash flow for the full year 2007. To calculate this metric, we started with normalized net income and then adjust for depreciation, amortization and capital expenditures.
For 2007, we have also added the cash flow from the Development Services gains. They were excluded from the P&L due to purchased accounting.
This is part of the ongoing operations of the development business which will be reflected in net income in future years. As a result of one-time items associated with the acquisition of Trammell Crow Company, we have also included the impact of the proceed from the sale of the equity stake in Savills as well as a reduction for the cash components of acquisition-related costs.
On this basis, in fiscal year 2007, our internal cash flow was $732 million. CBRE's internal cash flow typically is highly correlated to net income, due to our limited capital expenditure and working capital needs on an annual basis.
For 2007, net capital expenditures were $78 million, including approximately $20 million for acquisitions. For 2008, we anticipate net capital expenditures to approximate $80 million.
Please turn to slide number 11. For the full year 2007, revenue increased 20% as compared to the combined performance of CBRE and Trammell Crow Company for 2006.
Leasing increased 9% primarily due to stronger leasing activities in both EMEA and Asia Pacific, as well as slight growth in the Americas. Sales increased 22% as a result of the Americas growth in the mid single-digit range, combined with exceptionally strong growth abroad.
For the fourth quarter, both leasing and sales were impacted by the slowdown of the economy in the Americas. Brett will be discussing these two revenue areas in more detail, a little later in the presentation.
For property and facilities management, double digit growth was achieved for both the full year and fourth quarter. This momentum for outsourcing business is accelerating, as seen by the higher rate of increase in the fourth quarter.
Outsourcing is benefiting from the integration of the two companies and includes the early benefits of the cross-selling initiatives underway. The appraisal and valuation business grew 34% for the year and 18% for the quarter.
This was driven by higher frequency for appraisal and valuation of commercial real estate assets, due to increased ownership of assets and fund structures and the increased use of securitized loans for commercial real estate transactions. Global Investment Management revenue grew 51% for the year, based on growth in assets under management across all geographies.
This growth was fuelled by investment management and incentive more than doubling as compared to 2006. Development Services grew 212% for the year and 376% for the fourth quarter, based on strong project execution and installed pipeline.
The commercial mortgage brokerage business grew 3% for the year, yet dropped 21% in the fourth quarter, driven directly by the challenges faced in the credit markets. I will now cover our geographic performance on slide number 12.
Historically, we've shown our revenue performance by geography to give you a sense of our global diversity. On this basis, revenue in the Americas has continued to decrease on a year-over-year basis, now comprising 61% of total revenues.
However, if you look at our geographic rating based on EBITDA it shows significantly greater balance in our business. On this basis Americas represented 51% of total normalized EBITDA for 2007, EMEA 27%, Asia Pacific 9% and Global Investment Management 12%.
Thus about the half of our consolidated EBITDA is generated outside of our Americas segment. Please turn to slide number 13.
2007 was a very strong growth year for CBRE. Despite the weakness in select businesses in the fourth quarter, we posted Americas revenue and EBDITA growth of 47% and 37% respectively EMEA revenue and EBITDA growth of 41% and 38% respectively, and Asia pacific revenue and EBITDA growth of 55% and 89% respectively.
I will look at the quarter review, let's please turn to slide number 14. Revenue in the Americas increased to 33% to $1 billion.
Normalized EBITDA in the Americas increased 31% to $141.9 million. U.S.
market leasing activity remained positive for 2007. Office fundamentals remained healthy through the end of the year, with about 14 million square feet of net absorption in the fourth quarter.
Our preliminary estimate is that office rents rose 10% year-over-year, marking the third consecutive year of strong rental growth. Going into 2008, we expect demand in office and industrial to slow somewhat, yet remain positive.
With vacancy levels at historical norms, Tudor Weeden [ph] expects rents to continue to stay positive and grow approximately 2% in the office market and 3 to 4% for industrial properties. After a strong showing in the first part of the year, U.S.
investment sales activity decreased in the fourth quarter, as we projected on our Q3 call. Despite the fourth quarter decline, full year investment volume for the market as a whole rose 24% to $346.4 billion, excluding re-privatizations.
CBRE's investment volume grew by 26% according to real capital analytics enabling us to achieve the number-one market share at 17.5%. Despite the constrained CMBS markets and more stringent lending standards, debt and capital remain available and opportunity exists for investors that are not as dependent on leverage.
The decline of tenure treasury yields to 3.6%, has cushioned some impact of significant wider interest rates spreads. Real estate yields in the 6 to 7% range compare favorably to treasury yields.
This has increased real estate appeals to income-oriented investors and soften the decline in property valuations. Pension funds remain a growing source of capital and are expected to raise their target real estate allocations to $76 billion this year according to a recent survey by Kinsley Associates.
In addition, foreign investors remain attracted by the long-term values of U.S. real estate enhanced by the dollar's weakness and high network investors are another anchor to equity capital.
EMEA revenue was $437.6 million up 20% from 2006, and normalized EBITDA decreased 7% to $89.6 million. These results were driven by growth in leasing, declining vacancy rates and strong investment activity across Europe mainly during the first three quarters of 2007.
During the fourth quarter, leasing, and investment activities began to show signs of softening, driven primarily by weakness in the UK. The decrease in EBITDA in the fourth quarter was primarily attributable to non-recurring payroll-related costs predominantly in the UK.
The Q4, 2007 sales activity of €47.2 billion is about one-third lower than Q4, 2006. Despite the weaker fourth quarter, the high levels of activities for the first three quarters of 2007 resulted in another record year at €236 billion across EMEA as a whole.
Most notable fourth quarter bright spots in EMEA were from robust investment sales activity in The Netherlands and Spain. Investment transactions engineered by CBRE during this quarter established new highs for pricing in seven different European countries;.
Austria, Belgium, Germany Ireland, The Netherlands, Spain and the UK. For 2008, we are anticipating modestly weakening office leasing activity is EMEA and some easing in rental growth rates with the exception of Germany.
Additionally, the uneven pattern of investment activities seen across Europe in the fourth quarter of 2007 is expected to continue in 2008. However, our general expectations for 2008 point to economic growth in Europe of less than 2%.
Some economies, namely Ireland, Greece and perhaps Spain are forecast to see above-average growth. Asia-Pacific revenue was $198.4 million, up from the prior year.
Normalized EBITDA in Asia Pacific increased 49% to $31.2 million. The strength in Asia Pacific was very balanced across the countries, due to strong economic expansion and positive real estate fundaments.
Strong demand for office space and tight supply in prime locations including China, Singapore, Tokyo and India continues to drive up rents throughout the year. Foreign capital investment into the region continues with emphasis on retail, hospitality and industrial properties.
In addition, domestic investors redeployed cash and bought commercial property as a hedging inflation [ph]. Australia continued to exhibit reasonably strong investment activity and stable yields across most property sectors.
I will now turn the call back over to Brett to discuss more performance strengths in the business.
Brett White - Chief Executive Officer
Thanks Ken. Please turn to slide 15.
On the next few slides, I want to provide you some additional detail on our sales and leasing businesses performed in each of our geographies. Given our significant share of global leasing and sales revenues, it's important to note that our own performance is typically a bit better than the performance of the market as a whole.
In the Americas, sales increased by 7% for the full year 2007. But note that we decreased by 14% for the fourth quarter.
This impact was more severe in the U.S. as you would expect, as expect it to remain weak for the better part of 2008.
As for leasing, for the full year and fourth quarter 2007, leasing increased 3% and was flat respectively. The fundamentals for the leasing business remains sound as Ken mentioned and with rational levels of new construction coming online in 2008, our expectations are that rental rates will continue to grow, albeit at a slower rate than the 10% plus that we experienced in 2007.
In addition, you should expect some variability from quarter-to-quarter in this business, as leasing decisions tend to be impacted by market fundamentals and expectations for the economy. However, we expect leasing volumes or activity to decline appreciably in the first two to three quarters of 2008.
Please turn to slide 16. In EMEA, sales grew 44% for the year and slowed to 11% for the quarter.
Illustrating the impact, we had discussed in our third quarter call which was led by early weakness primarily in the UK. Leasing saw a similar slowing in EMEA with a full year improvement of 32%, following the 7% for the fourth quarter as economic growth slowed.
Please turn to slide 17. Trends in both sales and leasing in the Asia-Pacific segment remained strong throughout the year, which is demonstrated on a slide.
Sales grew 115% for the year and continued strong in the fourth quarter growing over 100%. Leasing grew 13% for the year and 21% for the fourth quarter.
The Asia-Pacific segment was not impacted by the economic slowdown outside of the region and we feel confident that the region's prospects for 2008 remain solid. Please turn to slide 18.
Next I wanted to cover some U.S. statistics to provide some context for what we are seeing in the market.
Vacancy rates for all property types have been modestly declining for the last three years. That the steady improvements slowed in 2007.
As shown in the accompanying slide on the top left, vacancy rates for office and industrial properties showed low movement. For 2008, vacancy rates are expected to increase for office and industrial properties, usually anticipated slowdown in absorption at available space.
While it has not been ticked up in data, we believe cap rates have already begun to expand across most property types. For 2008, cap rates are expected to increase depending upon quality of assets and locations.
You can see on this chart, the range of expected increases for each property type. As you might imagine, these potential movements will vary as market conditions change.
Please turn to slide 19. We continue to significantly expand our contractual work for major corporate clients by leveraging the strength of the legacy Trammell Crow Company outsourcing capabilities, with CB Richard Ellis' transaction management expertise.
We won or expanded eight corporate outsourcing relationships during the fourth quarter alone, including AT&T Oracle, McGraw Hill, and International Automotive Components Group. For all of 2007 we added 26 new corporate outsourcing clients expanded our service for 18 existing clients and renewed contract for 17 clients.
Of particular in note are the cross selling wins with Nielsen, BB&T and Oracle as noted on the slide. Now please turn to slide 20.
As you know, we don't go through the long list of large wins during the quarter and year, but this panel does depict some of our more recent wins and it suffices to say when one examines the largest and the most complex transactions done in our industry, any given year our name is fairly ubiquitous in these transactions. Please turn to slide 21.
Since 2005 to 2007, we completed 44 in-fill acquisitions for a combined purchase price of approximately $352 million. The associated annual revenue related to these acquisitions is estimated to be approximately $547 million.
In 2007, we completed 14 in-fill acquisitions for approximately $119 million. We associated annual revenue related to these acquisitions is estimated to be approximately $244 million.
We are continuing our aggressive approach to in-fill acquisitions in 2008. Now please turn the slide to 22.
Revenue for our Development Services segment totaled $74.7 million for the fourth quarter of 2007 and $136.1 million for the year. Pro forma EBITDA for this group nearly doubled in 2007 to approximately $74 million.
And now let me turn the call over to Vance Maddocks for a more detailed discussion about our Global Investment Management Business. Vance?
Vance G. Maddocks - President, CB Richard Ellis Investors
Thank you Brett and good morning. CB Richard Ellis Investors is a global real estate investment manager.
One half of our $38 billion in assets under management and one half of our people are located outside of the United States. We provide investment management services, primarily to large institutional investors, many of which invest in more than one of our investment programs.
Please turn to slide 24. Our investment programs include large, stable separate account contracts in the United States and the UK, sponsored funds including the firm's flagship Strategic Partners Fund Series and indirect investment programs for global investors, including Real Estate Securities Management and our fund to funds business.
These direct-indirect investment programs are very scalable and are a key part of our strategy of global diversification. In fact, 70% of our equity capital under management is from non-US investors.
Please turn to slide 25. We've had significant success growing our business through three key growth strategies.
First, we continue to expand our flagship fund series, Strategic Partners, both geographically and by increasing fund size. This fund series is our highest margin and fastest growing business.
We expanded the program to Asia and increased fund size significantly this year, raising $2.5 billion for these funds in 2007. Second we are expanding large global relationships.
We have been successful in raising capital from multiple programs, from key global partners. In many cases moving capital across borders.
We now have six global relationships of over $1 billion in size and 55 investors in multiple programs. And third, we've been aggressively growing our indirect investment programs including $4 billion raised for real estate securities and fund to funds investments in 2007.
Please turn to slide 26. The result of these growth strategies is compounded annual growth and assets under management of 28% over the last five years.
Notably, a significant portion of this growth is in assets located outside of the United States. Please turn to slide 27.
Our compounded annual revenue growth over the five-year period shown has been 40%. As shown, U.S revenue has grown rapidly, but is declining on a relative basis as our European activities accelerate.
The change in Asia reflects the liquidation of the program in 2004 and the expansion of our Strategic Partners Fund Series to Asia in 2007. Please turn to slide 28.
Our investment management fees are showing substantial growth reflecting three factors. First, the growth in performance in our large separate account relationships.
Second, growth in management fees from our Strategic Partners funds, which have increased in number and size. And, third growth in our indirect investment business all of, which generate annuity-type revenue streams.
Please turn to slide 29. We achieved substantial increase in equity raised in 2007.
Nearly a 40% increase from 2006. Our ability to raise capital is a direct result of investment performance.
The performance of our investment programs has been excellent and reflects the strength of our people and our direct access to the worlds leading real estate platform. The CBRE platform is a substantial competitive advantage for our professionals, providing access to industry research, local market intelligence and direct access to transactions.
As shown in the slide, the capital raised is strong indicator that our growth strategies are producing results. We are diversifying away from the U.S, expanding our funds business, and expanding to indirect vehicles, including Global Real Estate Securities Management and our Fund Of Funds business.
Please turn to slide 30. Capital availability is the investment capital, we had to deploy into our investment programs.
Total capital combines equity raise with the appropriate level of leverage for each initiative. As was the case in 2007, we continue to be very selective and very disciplined in how we invest in this turbulent market environment.
We completed acquisitions of $12 billion globally in 2007 and we'd like our position of controlling significant capital, when liquidity in the market has clearly declined. Please turn to slide 31.
The Global Investment Management business performed exceptionally well in 2007. Full year revenue totaled $347.9 million and a increase of 53% from the prior year, as a result of higher investment management in incentive fees due to a steady increase in assets under management.
Fourth quarter revenue was $79 million, which was down compared to Q4, 2006, based on the timing of carried interest realized in Q4 of 2006, versus earlier recognition in 2007. EBITDA in 2007 was more than double that of 2006, reflecting the scalability of the profits from this business.
Please turn to slide 32. In 2007 we recognized $88.7 million of carried interest revenue and recorded $62.7 million of carried interest incentive compensation expense.
Of the $62.7 million, $19.8 million pertained to 2007, with the remaining $42.9 million related to future period revenues. Excluding the incentive compensation expense pertaining to the future periods, EBITDA for 2007, would have been a $17 million, a 52% increase over 2006.
EBITDA margin for 2007 would have been 45%, which is consistent with 2006 on a similar basis. As of December 31, 2007, the company maintains a cumulative remaining accrual of such compensation expense of approximately $57 million which pertains to anticipated future carried interest revenue.
I'll turn the call back over to Brett.
Brett White - Chief Executive Officer
Thank you Vance, and good job. Please turn to slide 33.
While the first half of 2007 was a perfect storm of global liquidity doing our capital markets business and good economic growth supporting our leasing businesses globally, in the fourth quarter this environment had changed demonstrably. The current environment is one of the severely constrained liquidity and weakening US and UK economies.
Our expectation is that these trends will correct towards the positive in 2008, for the economy that correction is unknown. Please turn to slide 34.
While the rate of growth has slowed appreciably over the past few months, the foundation for long-term growth consistent with our long-term model remains quite secure. CB Richard Ellis is uniquely positioned to prosper in this environment.
While short-growth will be negatively impact, these impacts should not be severe due to our highly diversified revenue base. In addition, our strong balance sheet and cash flow will provide us with additional opportunities for growth, as we believe this current environment, like many before it, will significantly punish smaller, less diversified competitors, likely providing a right environment for further consolidation in the industry, an opportunity we are pursuing with vigor.
History has shown us that CB Richard Ellis tends to capture market share more quickly than our competition during difficult times and is able through a highly variable cost structure, to retain profits more easily than most. While no one hopes for difficult times, we at CB Richard Ellis are very excited about 2008 and we believe it will provide us with a number of very interesting opportunities to capture market share, hire terrific new people and possibly acquire excellent firms around the world.
Please turn to slide 35. So what does all this mean for CB Richard Ellis in 2008.
Given the uncertainty in expectations for 2008 global GDP, timing for recovery of the US economy and improvement in the credit markets, it is simply unrealistic for us to provide explicit guidance for 2008. Whatever number we would give you is bound to be inaccurate, given the rapidly changing in unpredictable environment.
On this call we have attempted to provide you with more detail on this fourth quarter 2007 performance on the capital and leasing businesses, capital markets leasing business those most effected by the economy, as well as some metrics to look towards the 2008 performance on those service lines. Additionally, it is our current belief that the economy and the state of the credit market will like worsen a bit before they improve.
Improvement may come in the late summer or fourth quarter of 2008. Further we believe there are other business line, for instance outsourcing, investment management et cetera, are well positioned to performed well and consistent with our longer term growth models and the parts of Europe and Asia Pacific will only see modest impact.
Given all these variables and the incredible resilience seen at our platform, it is not inconceivable that our earnings performance for 2008, could get to a general range of around $2.00 per share. It is important to know though there are many other potential scenarios that our possible in 2008, which could yield a very different result.
This concludes our formal comments today. Operator let's begin the question and answer, please.
Question And Answer
Operator
Thank you. [Operator Instructions].
First we will go to the line of Jeff Kessler from Lehman Brothers please go ahead
Jeff Kessler - Lehman Brothers
Thank you. Hi, Brett and hi Ken.
One quick, I guess one quick piece of advice maybe slide 32, in which you go through the entire carried interest... normalized carried interest process.
If you could include that in the press release or some format of that would help us enormously, instead of us trying to figure out what the add back or what the normalized would be. We know what you...
we know what you hadn't got in the fourth quarter, but normalizing that EBITDA will make it a lot of help to us to try to get to a number that we could normalize and put into our earnings estimates. And so you wouldn't get these ups and downs of what does it mean before your conference call.
Just one suggestion for me.
Brett White - Chief Executive Officer
Thank you Jeff.
Jeff Kessler - Lehman Brothers
Quickly, just a couple of things, on Development Services, on the purchase accounting what was the add back that you'd have to get to normalize that assuming going forward we have, was that $16 million, I may have missed it?
Kenneth J. Kay - Chief Financial Officer
For the full year it was about $61.6 million, which makes about $0.16 a share.
Jeff Kessler - Lehman Brothers
Okay, thanks very much, $0.16 a share. Okay, can you give us the nature and the size of the payroll problems that you encountered in the UK?
Kenneth J. Kay - Chief Financial Officer
Yes, I mean I wouldn't acquaint them with problems but it was probably in the range of about $10 million to $15 million. And what it pertains to was compensation associated with earn out on a transaction.
Severance costs relating to redundancies that were not deal-related but went to the P&L and then some reserve true-ups for kind of one-time insurance and benefit costs. So, those three components basically added up to that $10 million to $15 million number.
Jeff Kessler - Lehman Brothers
Okay. I guess that the next question I have is, are you...
can you give us... you gave some great detail on the transaction side, the leasing and sales side of your business by geographies.
Can you get a little more granular with regard to property and facilities management, particularly as these are going to be playing a much more important role, as you do some more cross-selling in 2008. How about geography or whatever breakdown you want to give us.
Are you looking at these markets for the coming year?
Brett White - Chief Executive Officer
Jeff is your question related to the breakdown of revenues by market, or what growth looks like in these markets?
Jeff Kessler - Lehman Brothers
What the growth looks like and the breakdown.
Brett White - Chief Executive Officer
Right. It's a really good question and Jeff, the first thing I would tell you is that for the most part, the entire industry of integrated corporate outsourcing is a U.S phenomenon and it's important to note that because, of course, if you want to play in that business, you better have a dominant footprint in space which we do.
And if you look at the large integrated outsourcing contracts that have been let over the last ten years, I would guess that more than 90% of those have been led from U.S headquartered corporations. Now these corporations of course have operations globally and that's important to note as well.
But the first point I would make is that when you talk about integrated corporate outsourcing, this is a US story to begin with. That's where you capture the account and then the execution delivery of that business is done off shore.
I just wanted to stress that because I know that sometimes in the write-ups that we read, or writing of transaction expertise in this case is sometimes pointed to as weakness which we find a little silly in this business. If you intend to be a player in corporate outsourcing, you better be a hard weighted in States and be a real strong player.
There now to having been said, the growth of that business and the growth of our property management business work that we do for institutional owners is strong globally and it's at the moment it's growing quite well here in the States it's growing quite well and Asia Pacific has been some time the same [indiscernible] for Europe and we don't see anything on the near term horizon that we would change there. And Jeff I think as you know the trend towards outsourcing if anything, accelerates a bit and a bit more difficult times as both the corporations and institutions look to become a bit more efficient in the way in which they manage and handle the real estate.
Jeff Kessler - Lehman Brothers
Okay my assumption is, is that the various tiers of outsourcing facilities management that you do or the EBITDA margins are all over the place from de novo facilities management at the bottom to high advisory fees at the top?
Kenneth J. Kay - Chief Financial Officer
You are exactly right Jeff, and for the other callers just a little color on that. If we think about and Jeffrey's spot on, when you think about a integrated corporate account, we are talking about AT&T and some others in this deck.
What we are doing for them can run the gamut of everything from facilities management which might be 10% to 12% EBITDA margin, business to transaction management which could be in the high teens to consulting advisory which could be in the mid upper 20s. And when you put it all together because the fees typically are weighted fairly heavily towards the management ability for end transactions, end up with that middish teen type of EBITDA margin on a consolidated basis.
Jeff Kessler - Lehman Brothers
Okay. One final question and I will get off, and that is there is a pretty well known piece of property that you seem to, if its going to be sold you seem to have the inside track on selling it on for a distress seller here in New York.
And I am wondering what is the extent of distress selling that you are seeing in the United States, given there has been a lot of stuff that's parsed out to paying the over levered folks that could perhaps help you in the coming year on the transaction side?
Brett White - Chief Executive Officer
Sure. Well, let me first...
I do feel I need to respond to the characterization of sales and what we are just referring to is the GM building in New York. That is not a distressed sale it is...
that building is Iconic Times 10 and we will, I am sure, trade it a price that all of us will be very, very impressed with. I think the point you are trying to make Jeff is there is certainly a dislocation in the marketplace right now in so will there be selling by owners to cover issues they have else where in their portfolio or other issues that might have and I would tell you that at the moment we really see very, very little advance.
And I think Jeff the reason is and you know the statistics, if you look at the default rate on commercial mortgage at the moment, it's less than 1%. It's very less than 1%.
There really isn't a lot of stress in the ownership market right now. Rents are good.
They have been rising for a number of years. The mortgages that we were financing to most of these owners in the building is pretty good.
I think the question is out that is, for those owner who put on relatively short-term financing which now needs to be replaced this year or next year, will the credit markets to be back to a more normalized state, which would allow them to replace the current debt in an amount close to what they have on the properties now. I think that's a bit unknown at the moment and if the answer to that question is no Jeff, if we did in the third or fourth quarter and the credit markets remain...
is difficult to say are now you could see owners who have seven years, 75% loan to value financing on buildings unable to replace that financing in which case you might see some selling, but again at the moment we are really not seeing much of that at all.
Jeff Kessler - Lehman Brothers
Okay. Thank you and congratulations on surprising us all on the Americas in Q4.
Kenneth J. Kay - Chief Financial Officer
Thanks Jeff.
Jeff Kessler - Lehman Brothers
Yes.
Operator
Our next question comes from the line of Brandon Dobell for William Blair. Please go ahead.
Brandon Dobell - William, Blair & Company
Hi. Thanks guys.
A couple of quick ones. As we think about the growth of EMEA and Asia-Pac, can one of you give a little bit more visibility on organic growth and also currency especially in EMEA?
Brett White - Chief Executive Officer
Well regarding EMEA and Asia-Pac, remember most if not all of it's really organic growth.
Brandon Dobell - William, Blair & Company
Okay.
Brett White - Chief Executive Officer
The Trammell transaction really didn't have much impact in those regions and so you should really think of that as really almost entirely organic.
Brandon Dobell - William, Blair & Company
Okay.
Brett White - Chief Executive Officer
And then from a currency standpoint probably for the year... are you talking about the year or the quarter?
Brandon Dobell - William, Blair & Company
The year?
Brett White - Chief Executive Officer
The year... from a revenue standpoint, it was probably about a $150 million or so and then from an EBITDA standpoint it was about $30 million.
Brandon Dobell - William, Blair & Company
Okay. Within the U.S.
business, an expectation for let's say at some point an '08 turnaround, how do you put that in context with the potential willingness or the need to start to pair back cost within the fixed cost base of the geography? I guess I am looking for some color around the philosophy, the willingness, or what point do you feel necessary to pick up kind of a second look at what you have in the cost structure given what could be a pretty kind of tough first half of the year?
Brett White - Chief Executive Officer
It's a terrific question and something that I was hoping one of our colors would ask and here's why. Two things I would want our investors and analyst to understand about the firm.
The first is that if you examine our financials going back, you can go all the way to 2001. What you find is that our focus on cost is intense at all times and in all cycles.
Our margins have always been, I think, impressive and they don't get there by happenstance, they get there through effective cost management. If you look at our margins in Europe compared to our competitors, the difference is striking and the reason is that our discipline around cost is very significant.
We have a fully built out global platform. We don't need to spend significance amounts of new capital building out our platform as that was done sometime ago.
So, that's our philosophy on a general basis. Now, what is terrific about 2007 and here we are in 2008 is that every time we conduct a large event within the firm and that could be a go-public transaction, it could be experiencing a credit...
or, I am sorry, a market downturn or a large acquisition, what we do is go back in and in essence rebuilt our cost structure from $1. And so, the way that 2007 played out which in retrospect, I think, makes a flick probably lot smarter than we actually are is that we were thinking in 2006 that there was going to be some correction in the markets coming.
We knew that a better balancing of our revenues towards contract outsourcing businesses was a wise strategic decision and that was why we negotiated and completed the Trammell Crow acquisition. By the way if you look at our percentage contribution of revenues from outsourcing in the fourth quarter on a percentage basis, they were, I believe, almost double of what they were fourth quarter 2006.
And what that acquisition allowed us to do in addition to rebalancing our revenues and providing some terrific, I think, downside protection to the firm, was we win and as we mentioned in the call we identified $90 million of net expense synergy savings and those $90 million did not come from just Trammell Crow in fact and Ken please jump in anytime if I got this wrong but I suspect when you added all up that quite a bit of those dollars came from CBRE cost structure or legacy cost structure and what all that means is that by February-March of 2007 we had just completed a severe cost restructuring and based on the acquisition because that's what we do and then the markets turned and so we found ourselves in August and September already right sized on the cost structure and again it is more coincidence than strategy but I'll take it either way. So as we sit here right now today and I am not going to give you the specific numbers but I want to tell you that we realized some significant additional cost savings in the fourth quarter run rate cost savings and first quarter's new Americas, that work is done and at the moment we don't see any area of the business that is going to require us to go back and do anything particularly severe now.
The last thing that I could on that point of cost structuring is all of our managers are paid their bonus program on the idea of making profits and when markets soften as some of our markets have done the last six months, our managers are typical ahead of us here at corporate on getting the cost. And so lots of discretionary expense that is a bit of a luxury in an up market has been differed and put on hold as it should be.
So we feel pretty comfortable about that.
Brandon Dobell - William, Blair & Company
Okay. I guess that the way to ask a question would someone implicit in that answer would be you feel like you got a decent handle on kind of how bad things could get in the U.S.
because I don't... I guess they don't take from your comments that there are some kind of reinvigorated effort internally to really look at the cost structure again with the...
with the expectation and things were getting a lot worst. So you feel like...
sounds like you feel like... you already know things are going to get worst but we are already kind of squared away in the U.S.
from a cost structure perspective and because we are variable we can kind of defend that margin; is that fair a characterization?
Brett White - Chief Executive Officer
I think it is and let me go back to some comments I made at closing where we actually put a number --
Brandon Dobell - William, Blair & Company
Right.
Brett White - Chief Executive Officer
on EPS. Let me tell you how we got to that and that is not guidance, it is...
basically we are looking at tele-trends extend in the business in the fourth quarter and that's why we gave you these specific number and we look at those trends and our assumption at the moment is that the credit markets and the... therefore the performance of the capital markets businesses certainly in the States and in Europe is going to worsen before it gets better.
And at the moment, and again this is just putting a figure in the air and guessing, but at the moment our expectation is that those issues generally sort out by later quarter or early fourth quarter. But do they get a bit worse than they were in the fourth quarter.
Additionally we believe that U.S. economy is either in recession or darn close to it.
And I would remind the colors that for our business, for firms that do what we do, US GDP below about 2%... 2.25% is a stressed environment.
So whether or not US GDP goes negative really doesn't matter to us. It's just a stressed environment right now.
Our assumption is that the trends you saw in the US leasing business in the fourth quarter also are going to worsen before they get better but they as well will start getting better at third or fourth quarter. If you take those two assumptions and I'm not going to give you percentage declines, we'll just take those two assumptions and then balance that with the trends you saw in our other business lines in the fourth quarter and if all that played out that way, you would end up in an earnings number that's going to be within shooting distance of the number we threw out there.
At best based on so many assumptions that will probably in retrospect prove to have been wrong but at the moment that's one way to think about it. And what we wanted to do for you was, hey, look, this is a very resilient business, it is very different than the business we managed in 2001 through 2003, for that matter 1990 through 1993.
And the diversity of revenues, and the diversity of where our profits come from can take these kinds of hits and produce... we can start to be pretty terrific results.
Now again, no clue what this year is going to look like but if you want to paint a picture and use those colors I just gave you'll get the results something like that.
Brandon Dobell - William, Blair & Company
That's fair.
Brett White - Chief Executive Officer
Ken, do you want to add anything to that.
Kenneth J. Kay - Chief Financial Officer
No, I completely agree with you. I thought you did a great job in capitalizing at least what all of our thinking is.
Brett White - Chief Executive Officer
It is bonus season for Ken.
Kenneth J. Kay - Chief Financial Officer
Really.
Brandon Dobell - William, Blair & Company
It's kind of an add-on to that maybe for Ken; implicit within the assumption around that number... around Ken's comments, there's some degree or range within development and invested management for kind of the unpredictable numbers, the carried interest, the development gains that are recognized.
Wonder if you could go through some of the... based on the range that are high points, low points and how we should think about modeling those two lines or if there is a...
if the market remains a lot worse or like it is right now for a lot longer, does that change you are thinking about the development business in particular or is it... it's more as an accounting treatment and not really what's going on in the economy with the drive that...
because of development gains.
Brett White - Chief Executive Officer
Ken do you want to take that?
Kenneth J. Kay - Chief Financial Officer
Yes. I mean I think for the investment management business, no, we talked historically about having on an annual basis consistency in carrying interest revenue and I think our expectation for 2008 is that carry interest revenue would be comparable to if not a little bit better than what we kind of saw in the 2007 time frame.
Brandon Dobell - William, Blair & Company
Okay.
Kenneth J. Kay - Chief Financial Officer
So I think your expectation should be that and as we've talked about also for that business that we keep showing relative to the APEX is that that business should be generating about a 40% to 45% EBITDA margin which we would expect going forward on a normalized basis.
Brandon Dobell - William, Blair & Company
Okay.
Kenneth J. Kay - Chief Financial Officer
I think with regard to the development business and by the way all these things are kind of incorporated into the number that Brett talked about on that last slide. For the development business I think we are expecting based upon the strength of kind of the end processes work in the pipeline, another pretty strong year for that business as well with healthy component of gains.
For 2008 we'll still have a portion albeit a lot smaller than the $61.6 million of gains that went to the balance sheet. We will still have a portion of that.
We are probably expecting something a little bit less than maybe half of that number since it would be impacted by purchase accounting but we would expect to generally have pretty strong year for development with a strong number of projects that will come to fruition and we will be able to recognize gains on whether it goes to the P&L or the balance sheet.
Brandon Dobell - William, Blair & Company
Right. Very helpful, thanks a lot.
Operator
Our next question comes from the line of Will Marks from JMP Securities, please go ahead
Will Marks - JMP Securities
Thank you. Hello Ken, hello Brett.
To clarify the last answer or on investment management. So during 2008 we should expect a margin close to...
an actual reported margin close to that 45% that was the pro forma margin for 07?
Brett White - Chief Executive Officer
No, my comment was we are focusing in on more than normalized. I mean excuse me it's a function of...
the carried interest revenue that we recognize plus also the amount of incentive compensation expense that we will have to recognize associated with potential future years carried interest and that obviously is a developing item that we track during the course of the year. And so when looking at the margin for that business, you should anticipate that a normalized margin will be in that kind of 40 to 45% range.
As far as the reported margin, it, of course, might be a little bit different than that.
Will Marks - JMP Securities
Okay. On the different question, Brett you had mentioned...
you said leasing volumes in the Americas should decline and I missed the word in the first two quarters of the year. Was it --
Brett White - Chief Executive Officer
By... I think they will decline appreciably.
Will Marks - JMP Securities
Okay. And would that be somewhat offset by higher revenues per lease transaction because of higher rents.
Brett White - Chief Executive Officer
No, I don't think so will. What tends to happen in environment like this is people pull back both on the number of transactions, the velocity of transaction but also when there is negative sentiment in the marketplace, decision makers are taking shorter-term leases and less space.
So it's very attitudinal and we saw this... really it's interesting; well we saw this attitudinal impact on leasing business all of 2007 and as early as the early month of 2007 even though economic activity was good and people were very, very happy.
It seemed, decision makers on space leasing were clearly beginning to take a bearish view. And so as we sit here right now, and I think right now you can look at this kind of a trough or close to it to a negative sentiment, people are really scaling back on their leasing and waiting for positive signals that there will be some economic growth and some reasons to get more bullish.
So, no I don't think it will be offset by higher rents or longer term leases.
Will Marks - JMP Securities
Okay. And on Americas sales, two of your competitors have come out with studies not relating to their O' numbers, but for their particular clients on how investment sales in the Americas are expected to grow or decline this year and one has been I think "approaching 25% and the other was more like implied 30% to 40% decline.
Do you have... do you put out anything for your clients, or can you comment on that in the U.S.?
Brett White - Chief Executive Officer
No, we thought that we can give some views around what they think will happen in the investment property markets both in the U.S. and in similar jurisdictions as well.
But at the moment, I think that that kind of forecasting is dangerous. It's just...
look, in an environment where there is such a high range in view just around the more basic metrics such as U.S. GDP, and for this particular area you are speaking too well about such a variety of things about when the capital markets will return to some normalcy.
Trying to predict what those declines might look like is really I think a bit premature. I do think situation will begin to clarify itself relatively soon.
I am hopeful that by the spring we will be able to give you much better views and information around this topic but right now it's a very fluid situation.
Will Marks - JMP Securities
Okay. And a couple of quick questions hopefully.
The... your sales in EMEA, I believe, were up 11% during the quarter and one of your competitors had a negative figure of 12%.
Do you see that figure going potentially negative, I am not sure if you commented on that on the call?
Brett White - Chief Executive Officer
Well what we believe is that the... certainly the business in Europe and the business in the States both are going to be...
the capital markets business will be negatively impacted in 2008, where that goes... look, I really don't...
I am not comfortable trying to put numbers around this because it's just... we didn't and I am not comfortable doing that.
Now it's just so premature at the moment, I think it's dangerous. I know what you guys want and I appreciate that which is some forecast but I think at this point the biggest paper we can do to you...
for you is simply be honest and say, it's a fluid situation, certainly the European markets... I'll say this well, the European markets are a bit better diversified than the States.
You have got a number of different economies that play over there with very different rates of growth. As we mention Germany will probably have a pretty darn grade this year this year and we think the UK investment properties sale market is certainly going to feel some pain.
But where all that plays out, we just don't know.
Will Marks - JMP Securities
Okay. And on the $80 million of CapEx, does that include any acquisitions at all in '08?
Brett White - Chief Executive Officer
Ken?
Kenneth J. Kay - Chief Financial Officer
A modest amount... I would say, the vast majority of that would be run rate.
Will Marks - JMP Securities
Okay. And finally share repurchase, you don't have a program right now, would you consider for the repurchases?
Brett White - Chief Executive Officer
We always... we all are standing answering this and we are going to be where we consider everything all the time and at a moment we do not have a program in place but that could change and wait and see.
Will Marks - JMP Securities
Great. Thanks Brett, thanks Ken.
Operator
And we have time for one final question. That will be from the line of Jay Habermann with Goldman Sachs.
Please go ahead.
Jay Habermann - Goldman Sachs & Co.
Hi, good morning. Just a question that you mentioned picking up share and I am just wondering what sort of opportunities you are seeing at this point in a cycle and obviously you have some free cash flow to work with and just what you are seeing out there?
Brett White - Chief Executive Officer
Sure. Well Jay we pick up share a couple of different ways in markets like this.
The first and probably the most significant is when markets become a bit stressed, there is a clear flight quality both among customers who move from smaller, less well-capitalized vendors or less diverse vendors to big names like ourselves or Jones Lang. And we have seen that in every down cycle and we are seeing it now and I expect we will continue to see it in 2008.
We also see that phenomenon among key fee earners in the business around the world. So if I just play a scenario for you, imagine you are working for a firm that has one business line and perhaps it's just capital market, that firm is going to feel a different kind of stress or is right now in a different kind of stress than we are.
And you find that many times fears in those firms... that's close downhill, and we are a place they can come to where we don't need to make as I mentioned earlier any material cost reductions to their business because the way I addressed our business model works there we are able to fund investments and do what we do.
So you see it's like the quality both among folks who generate revenue for firms like ours and customers. We will also be able to get a share and are doing so very aggressively right now through infill acquisitions and I think that again this is not new, this happens, you can almost predict this from a playbook when the markets become unstable a bit as they have been you find that there are lots of relatively small firms who may have been thinking that their valuation had lots more to grow that they didn't need to sell in 2007 because sky is the limit on performance.
Now they're looking at 2008, they are doing their own models and again a small non-diversified business, if we are going to feel this market a lot worse than we are, those folks... many, many of those folks take an opportunity like the time right now to test the water on a sale and we are very aggressive in that market at the moment and finding lots of opportunity.
Jay Habermann - Goldman Sachs & Co.
Any particular geographies that you are looking at?
Brett White - Chief Executive Officer
We... as you know, Jay, we look at all three of our global geographies as an opportunity for acquisitions.
We have a strategic priority in certain business lines and in certain geographies and in the business lines, if all things were equal, we would prefer to buy at the moment businesses that focus on outsourcing or more contract revenues and if all things were equal, we would probably prefer to buy businesses that are in Europe or Asia to continue our long-term strategy to diversify our revenue base geographically. But as I mentioned before on these calls, our approach to acquisitions have to be both strategic and opportunistic and in our business which is a...
is a bit of unique business. Mainly small companies are owned by their founders or they are owned by a group of partners and they only go to market once and when they go we want to be there first and you may get one bite at that apple and if you can bite, that's great.
And again for us going back to my comments I made on the script deck is you know we look at a market like the one we are in right now with lots of enthusiasm because we know it would bring some good firms to market and we know that a lot of firms that do... we do aren't going to have a capital to pursue acquisitions we do and we will.
Jay Habermann - Goldman Sachs & Co.
Okay. And then just one final question and it's...
just sort of tied to the cycle, on slide 18, you did give some forecast for rising Cap rates and obviously increases in vacancy rates in the coming year?
Brett White - Chief Executive Officer
Yes.
Jay Habermann - Goldman Sachs & Co.
I am just wondering how you see this cycle playing out. Obviously this would be the first time I think that you'd see property prices possibly declining versus sort of 2001, 2002, 2003 where the fed rate activity really sort of drove commercial real estate pricing and I am just wondering obviously with prices you're forecasting potentially falling this time, should that in effect push out the recovery beyond what you might be forecasting?
Brett White - Chief Executive Officer
It's a really good question, and it's... I even hazard to call, we are doing forecasting.
I think it's... I would be more comfortable with modeling or educated guessing and what we are doing playing of variety of scenarios out so as we thought about 2008, we built lots of different models with different basic underlying assumption around economic activity, so global and U.S.
GDP but also recovery in the capital markets on a timed basis and of course, Jay, it's not only the timing issue of when we get recovery but what that recovery looks like. Is it...
in other words, I think what's going to happen to capital markets is that we are going to reset at a level of activity and a level of evaluation at some level, and what that reset level is January 2007 or January 2006 or March of 2005, we don't know. Now we've played out those models and we have looked at those scenarios.
I do think we are going to see valuation declines in some property types and in some markets. I don't think for generally good property you are going to see a lot of decline, and on the recovery side at least history had shown us, and Jay even you made the right point which is the cycle may be different than 2001 through 2003 and 1992 through 1993.
But out thought at the moment is that we are going to feel some pain, the industry is going to feel some pain the next 6 to 8 months, but that it's not unlikely that we would see a resetting and a return to normalized growth rates some time late this year. And again as I mentioned to Will, it's just...
unfortunately it's just too early to tell, at the moment it's just far too fluid a situation to really try and getting more precise than that.
Jay Habermann - Goldman Sachs & Co.
Okay. And just one follow-on thought.
In terms of un-invested management. Are you seeing much in the way sort of tenants are taking longer to sign lease contracts today.
But are you seeing your partners on the investment management side simply holding off, looking for better IRR turn of returns overtime?
Brett White - Chief Executive Officer
Yes, Ken is the answer still with you?
Kenneth J. Kay - Chief Financial Officer
Yes.
Brett White - Chief Executive Officer
I think the decision to make investments into funds in the U.S. have slowed down a little bit second half of last year, but there is a lot of different types of capital out there and there is a view now that there's an opportunity in the U.S.
as we go through recovery and the higher returning capital, I think, is accelerating right now. There's certainly a lot of capital out there on the sidelines.
And generally people are taking a little bit longer to make decisions.
Jay Habermann - Goldman Sachs & Co.
Okay, great. Thanks for all the detail this quarter.
Brett White - Chief Executive Officer
Yes.
Operator
And with that gentlemen, you can please go ahead with any closing statements.
Brett White - Chief Executive Officer
Nick, do you have anything to --
Nick Kormeluk - Senior Vice President, Investor Relations
I hope... I think that's all.
Thank you very much for joining and if you have any follow-ups you know where to reach Ken and myself for follow-ups to the call. Thank you.
Operator
Thank you. And ladies and gentlemen, that does conclude your conference call for today.
Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.