Jul 30, 2008
Operator
Ladies and gentlemen, thank you for standing by and welcome to the CB Richard Ellis Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session with instructions being given at that time. [Operator Instructions].
As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Senior Vice President of Investor Relations, Mr.
Nick Kormeluk. Please go ahead.
Nick Kormeluk
Thank you, and welcome to CB Richard Ellis second quarter 2008 earnings conference call. Last night we issued a press release announcing our financial results.
This release is available on the home page 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 archive 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. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our momentum, and possible scenarios for 2008 and 2009, future operations, future expenses and future financial performance.
These statements should be considered as estimates only and actual results may ultimately differ from these estimates. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today.
Please refer to our current annual report on Form 10-K, in particular risk factors and our current quarterly report on Form 10-Q which are filed with the SEC and available at the SEC's website at www.SEC.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today. We may make certain statements during the course of this presentation which include references to non-GAAP financial measures, as defined by SEC regulations.
As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures which are attached hereto [ph] within the appendix. Please turn to slide 3.
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 Ray Torto, our Global Chief Economist. I would now like to turn the call over to Brett.
Brett White
Thank you, Nick and good morning everyone. Please turn to slide 4.
I know that most of you are hoping to hear the fundamentals and commercial real estate have bottomed and business conditions are improving. At the time of this call, I can best describe the current environment as being very challenging and still having a high probability of getting worse before we see improvement.
That being said, our management team has gotten this Company through similar environments in the past and sure there's have been conditions have worsened and would likely worsen more. We also know they will bottom and then will improve.
When conditions do improve they should do so with some vigor. Let's again reflects the same, our major account win, growth and revenue and profitability across all of our outsourcing businesses continues to be impressive, but flight of key talent and clients from regional and national competitors to our firm continues as the flight quality strengthens.
Our retention of key personnel remains very high and morale is good somewhat. Our mergers and acquisition strategy has been executed according to plan year-to-date, with 13 firms having been acquired in the past 7 months.
Capital commitments in our global investment management business continued its strong pace and we believe we will raise an excess of $7 billion of new equities this year. And for now what's new?
The global markets have taken a decided turn for the worse. Global capital markets sentiment after showing early signs of stability in the beginning of the second quarter, have deteriorated substantially since then.
And these markets are arguably worse now than at any time in recent memory, with no indication of recovery any time soon. As we have been predicting since late 2007, the U.S.
and UK leasing volumes are now deteriorating materially due to slowdown in this two large economies. Volume decline in both the capital markets and leasing businesses are approaching the worst decline seen in the early 1990s and 2001 through 2003.
We see no near term recovery in either. All of this combines to provide us a much more negative outlook on the business today than we saw earlier this year.
Please turn to slide 5. Although markets are extremely difficult, CB Richard Ellis continues to post significant new business gains and is being hired by the world's largest owners and occupiers to handle their real estate needs.
Listed on slide 5 are just a few of our major wins for the second quarter, which includes the sale of the General Motors building in New York, the largest single property asset sale in history. Now overall investment sales market activity went down as result of the economic environment.
We continue to command an outside share of total activity. According to real capital analytics, in the first half of 2008, CB Richard Ellis' share of total U.S.
investment sales activity with 17% or more than double our nearest competitor with a 7% share. In addition, we once again held the number one position across office, industrial, retail and multi-housing properties.
Please turn to slide 6; we are continuing to leverage our dominant market position and financial strength to pursue our infield acquisition strategy and we were highly active in the second quarter. We completed five transactions since the end of the first quarter, for an aggregate purchase price of $13 million.
The transactions add approximately $50 million of revenue on an annualized basis. year-to-date in 2008, we completed thirteen transactions for an aggregate purchase price of $135 million, which adds $152 million of revenue annually.
Please turn to slide 7; as we have done in the past couple of quarters, I would like to update you on select U.S. commercial real estate statistics, to provide some context to what we're seeing in the market.
Forecast vacancy rates for 2008 for both industrial and retail properties in U.S. have deteriorated since our last call.
However the forecast for the office market improved modestly to 14.3% from our prior forecast of 14.7%. These projections are a direct result of the corresponding U.S.
absorption trends we forecast Our cap rate forecast by property type have also increased as the slide illustrates. Ray Torto will spend more time discussing market metrics in just a few minutes.
Please turn to slide 8. Here we've provided a more detailed breakdown of results of our sales and leasing businesses in the Americas.
Sales for the second quarter declined 49% year-over-year. Year-to-date sales were down 44%.
As expected U.S. capital market activity remained weak in the second quarter.
Investor sentiment is extremely cautious, credit availability is sharply limited and buyer and seller expectations are highly polarized. These factors conspired to reduce market wide investment sales activity by 60% during the first half of 2008, according to real capital analytics.
As we had predicted on our earnings call last quarter, the U.S. leasing business experienced the impact of the economic slowdown and declined 16% in the second quarter, as compared to the second quarter last year.
On a year-to-date basis, leasing was down 2% from a year ago. For the first time in more than a year, both suburban and down town office vacancy rates increased.
Turning to slide 9; we see that sales and leasing results for EMEA. Compared to last year CBRE's sales revenue in EMEA was down 33%, both for the second quarter and year-to-date 2008, for the same reasons we just describes in the Americas.
Most of Europe is expected by this dud active location [ph] although investor demand appears to have held up most currently in Eastern Europe. Although the leasing business in EMEA grew 6% in the second quarter, the rate of growth has slowed considerably from last quarter.
Leasing activity in rent movement in the main European office market increasingly reflect the weaker economic outlook for the region, and we continue to expect leasing activity this year to fall short of last year's exceptional levels. In the UK leasing dropped sharply in the second quarter, particularly in the city financial district.
Second quarter results for the Asia-Pacific region is as shown on slide 10. A slowing global macro economy and unsettled international capital markets have impacted real estate investor confidence in Asia as well.
Sales revenue for the region was down 23% in the second quarter, compared to the same quarter last year and lowered by 10% year-to-date. The leasing business was up 31% for the quarter but like EMEA, the rate of growth is showing signs of a slowing.
For a more detailed discussion of our economic outlook, I will now turn the call over to Ray Torto. Ray?
Ray Torto
Thank you, Brett. Please turn to slide 11.
On financial icon stumble, assets prices are in derogatory [ph], cost of living and doing business is escalating. Animal spirit, Ian de Stains [ph], call them dominates the market fundamentals besides the point.
The unwinding of the U.S. housing and mortgage market euphoria has produced tremors that at mid year 2008, have reached seismic proportion.
Whereas a year ago, risk was priced very low, investors could not get enough of it. Today the market is fissile of almost any credit risk.
Financial institutions and markets across the globe are reflecting that fear. It is our view that U.S.
policymakers have addressed aggressively and successfully the problems of systematic risk of the U.S. economy.
However, we expect more bad news over the next six to nine months from the economy, as job cuts continue, and from real estate markets, as occupancy, rents and prices fall. That said, we think the headlines do not accurately reflect the real estate fundamentals, whether in the United States or across the globe.
No one can predict on the trepidation belief that companies and investors will prepare for more bad news with a strategy in mind in the short run and plan for the recovery in the long term will emerge stronger in the end. Since I am not a psychologist but an economist, I can only bring to the discussion an analysis of the fundamentals.
Let us look first at the economics fundamentals. Economic growth has slowed dramatically in the United States, Europe, in Asia and Japan as shown in slide 11.
However, Asia ex-Japan still is growing above 8%. Unfortunately the U.S.
and Europe combined, make up about 50% of global GDP. If we add in Japan, that is another 7%.
What is growing fast is small and what is slowing is majority of the world output. Europe's economy has been hampered by constraints of our consumer spending, which is being impacted by a combination of rise inflation, high interest rates, falling housing prices.
As a consequence, most European economies are expected to produce sub-trend growth for 2008. In Asia, slowing global macro economy and unsettled international capital markets have impacted consumer expectations, as has inflation in food costs.
Banks are taking a cautious stand in granting loans coupled with the need to raise interest rates to curb inflation. The impact is that all economies are slowing their pace of growth.
That said, the pace is still quite strong in Asia compared to Europe and the United States. Asia 3 billion is positive for the U.S., because the U.S.
trade balance is narrowing as imports fall and exports accelerate. The continued growth in Asia plus the weak dollar make it possible for U.S.
exports to increase significantly. Some economists are estimating that trade alone will add about 1 percentage point of GDP growth in the second quarter.
Fed Chairman Bernanke has recounted the numerous difficulties facing the U.S. economy and the ongoing strains in financial markets, declining house prices and softening labor markets, rising prices of oil, food, and some other commodities.
We expect more bad news in all of these areas for the remainder of 2008 and into 2009 during what we see as a slow recovery. Stock growth is an important dollar of demand for commercial real estate.
In slide 12, we contrast current path of job losses with the levels during the last financially-driven downturn in the early 1990's. We believe the pace of job losses in 2008 is less alarming than it was back then.
In the 1990's there were 12 months of job losses of greater magnitude than we've seen today, followed by nine months of essentially flat growth. 2008, we are thus passing six months of job losses.
I can certainly expect the next 3 to 6 to be similar. But we don't expect the size of the losses to reach a level early 1990's.
The U.S. economy is adjusting from an unsustainable over allocation of resources into housing and mortgage production and from auto and airline industry restructuring due to long-term implications of oil prices.
In light of this, it is surprising that the job losses to date have not been greater. Fortunately, there are sectors of economy that are growing, such as export industry, oil, healthcare and life sciences.
Unfortunately, this growth, which we believe will continue into next year, is not enough to offset the negative drag of construction financial and auto and airline related decline. But we think the overall job growth will be modestly positive in 2009.
It will not be strong enough to match the growth of the labor force. Hence, unemployment rates will continue to rise into 2009 even if jobs changed numbers eventually trend positively.
If we were to trace the line going forward from today, in slide 12, we would show modest job losses for the next six months, followed by stabilization and a slight recovery. Job contraction will be shallower than in the 1990s but nevertheless painful.
Let's turn now to commercial real estate fundamentals. Slowing global economy has impacted commercial real estate fundamentals.
Its net absorption or take up has slowed almost everywhere, and both occupancy and rents have fallen a bit. For example, in the U.S.
second quarter vacancy levels are up over year ago levels by 50 to 100 basis points which is shown in slide 13. The current level of vacancy is in the range of a natural rate, which is the rate at which rents will continue to rise and then will fall.
However, vacancy is expected to rise into 2009 while absorption turns slightly negative. So upcoming quarters will bring more bad news in the commercial real estate, higher vacancy, lower rents, weak absorption but will not approach the acute pain we saw in the early 1990's downturn or even in the 2001 technology recession.
The expectation for commercial real estate is much like what we describe for job growth, shallow weakening but stretching through 2009. While we expect overall market fundamentals to soften, many commercial properties with tenants in place will not see their cash flows back.
In fact, strong market rental growth in recent years is boosting NOI and cash flow, a central [ph] from four year, a longer leases into today's marketplace. Good cash flows are one reason that CMBS delinquency rates continue to be at historic lows, just 0.44% across all property touch.
Properties that are on the cuts for trouble are those with marginal tenants or no tenants because of he competitive disadvantages of speculative development reason. Because there are a few distressed owners, investment market has seen a large spread between bid and asked pricing after transaction velocity down considerably.
Let us compare today to history. Let's put today's real estate market for Bell into context, by comparing the economic and real estate performance in 2008 to earlier recessionary periods, especially the early 1990s and 2001.
The rate of negative change of GDP and job growth during this cycle is expected to be relatively modest. As already indicated, negative job growth will not be as severe as earlier periods and GDP is expected to stay positive during this downturn.
As shown on slide 14, economic rent, it is a measure of the change in gross income of the property, is forecasted to decline just 1.2% on average across the country during this down cycle. This is dramatically better than the sharp reduction in 2001, well below the decline of the early 1990's as well.
Relatively sanguine analysis does not mean that we don't expect some pain as the economies continue to move from product [ph] to correction in 2008. Of course, most of the correction is expected in the pricing of real estate assets.
Next we turn to capital market. Global capital market have weaken materially, global investment sales activity dropped by approximately 50% during the first half of 2008.
Please turn to slide fifteen. These estimates are according to Real Capital Analytics.
Overall market conditions remain extremely challenging, focusing on the U.S., the CMBS market is booming. Only $12 billion of originations during first half '08 compared to $137 billion, the first half of '07, as Wall Street lenders focus on restoring their balance sheet and repairing their reputation.
Higher spreads coupled with much tighter underwriting standards has raised capital costs significantly and made proxy acquisitions less attractive for many buyers, particularly with sellers holding the line on pricing. The growing concerns about Freddie Mac and Fanny Mae has added to the negative market psychology.
Although the announced Treasury and Fed plans appear to have restored some level of confidence in the capital market. Most equity investors continue to take wait and see attitude.
Exception are Southern Well Funds and other well capitalized offshore investors, for whom I can add Trophy Assets full strong appeal. This can be seen in the significant role of Middle East Capital in Boston [ph] properties purchase of the GM building and recapitalization of the Chrysler building.
However foreign fund activity is limited to a handful of major big cities like New York, Washington, Houston and Los Angeles. Still the market stand-off prevails.
Sellers generally hold firm to offer pricing or buyers demur from raising bids appreciably. Interestingly owner's confidence is reinforced by not only by their current cash flows but potential NOI and asset value implications to general price inflation.
Production costs are high, high [ph] and the pipeline is very limited and if there is tight [ph] kind of market in near future, real estate would be a good inflation hedge. Bridging the divide in expectations and forging a meeting of the mind on valuation will be essential to returning the investment markets to more normalized activity levels.
One thing is certain, there is plenty of capital looking to buy real estate at the right price. Investors are only uncertain about when they should reenter the market, not if they should.
We strongly believe the commercial real estate will hold up well relative to other asset classes. Property market fundamentals, capital market volumes and philosophies take time to recover, but in the long term investors will continue to look to real estate for income, appreciation and diversification.
I would like now to turn the call over to Ken.
Kenneth Kay
Thanks Ray. As indicated on slide 16, revenue was $1.3 billion for the quarter.
Net income adjusting for one-time items $33.2 million which translates to 16 net cents in adjusted earnings per share. Normalized EBITDA came in at $114.5 million.
The biggest contributors to the decline in adjusted net income and earnings per share were the 12% decline in the revenues and resulting margins driven predominantly by both lower sales on a global basis and leasing in the U.S. and the UK.
These declines were offset by growth in outsourcing revenues albeit with lower EBITDA margins. Included in the revenue decline were lower results from the global investment management business due to the timing of recognition of carried interest revenue and incentive fees, both of which typically generate higher EBITDA margins.
The development services business also reflected low EBITDA as a result of gains from property dispositions that were deferred. The decline in margins and net profitability are magnified by the uniqueness of the economic downturn we are experiencing.
In prior recession, capital markets and leasing mostly moved in different directions, providing a natural hedge if you will. In other words when the economy was down, interest rates were lowered in order to stimulate growth.
This in turn stimulated the capital markets business. This growth in the Capital Markets business naturally served to mitigate softness in leasing.
There may have been several quarters of overlap, but when the economy started to rebound and interest rates increased, leasing growth would then take hold and provide mitigation to the lessening of the Capital Market's activity level. However, what we are seeing in this economic downturn, some may call it a recession, are conditions that are detrimental to both the capital markets and leasing businesses and a general dearth of available financing, which does have a depressing affect on the development services and global investment management businesses as well.
As we have always said, a slack collection [ph] environment would be the worst scenario for the commercial real estate industry and these markets are behaving accordingly. Consequently the steepness of the margin declines which could be in the range of 300 to 400 basis points is reflective of the simultaneous negative effects on our highest margin businesses, thus driving a deeper impact on earnings.
Our second quarter results are summarized on slide seventeen. For the quarter revenue was $1.3 billion, down $175.5 million or 12% from the year ago quarter.
The decline in revenue was primarily due to the reasons previously discussed and we'll provide another top level view on revenues in a few more slides. As a percentage of revenue, cost of services rose to 56.1% from 53.1% in the second quarter last year.
This increase was mainly due to the shift in the mix of revenues with outsourcing including reimbursable [ph] growth, comprising a greater portion of the total, additional higher professional salaries resulting from prior acquisitions mostly in the EMEA and Asia Pacific and organic growth at the services platform also added to the cost base. Operating expenses of $468.8 million were essentially flat versus the second quarter of last year.
Declines in overall compensation cost from lower incentive compensation expense were offset by a higher salaried personnel, mostly due to acquisitions, increased technology spending and higher occupancy cost coming from new offices in international growth markets. The equity loss from unconsolidated subsidiaries was primarily attributable to the write-down resulting from the decline in value of an investment maintained by the Global Investment Management business.
The second write-down of an investment maintained by the Global Investment Management business was reflected in other loss. The additional shortfall from the prior year's second quarter equity income was attributable to equity income from a fund liquidation in the Global Investment Management business and equity income from gains on disposition of assets by the Development Services business, both in the second quarter of last year which did not recur.
After adjusting for one time items the resulting EBITDA for the quarter was $114.5 million, down 57% or $153.1 million from the prior year. Please turn to slide number 18.
This slide reflects the Company's year-to-date operating results through the second quarter. We have provided this information for your reference, but will not devoting time to discuss this in our prepared remarks.
Please turn to slide number 19. Total revenue in the second quarter of 2008 decreased by 12% from the prior year second quarter.
Leasing was the business line that generated the most revenue as the percentage of total Company revenue at 33%, but declined 6% year-over-year. Property and Facilities Management continued to deliver strong performance and grew 29% year-over-year for the second quarter.
Sales revenue on a combined basis was down 42% from the prior year quarter. The appraisal and valuation business declined by 9% in the quarter.
New valuation assignments trended lower reflecting the difficult macro environment. Global Investment Management revenue was down 50% year-over-year, and Development Services revenue was up 84% attributable, mainly to construction revenue.
The commercial mortgage brokerage business was down 44% year-over-year as the credit crunch continued to exact a toll on loan volume. Second quarter 2008 loan originations fell 46% to $3.2 billion as compared with the second quarter of 2007.
The decrease was less pronounced then the first quarter when year-over-year volume fell 60. Please turn to slide number 20.
Our contractual outsourcing business continues to be a significant growth engine for CB Richard Ellis. More companies are making the decision to outsource their real estate functions and we continue to succeed in winning, expanding and renewing long-term contracts with these corporations.
During the second quarter, we added five new outsourcing clients, including Visa, and Dr. Pepper Snapple.
We expanded six existing relationships, including General Electric and Piedmont Health, and we renewed existing relationships with 8 clients, including BP America and Bank of America. Our property and facilities square footage under management has grown at a very healthy rate that has increased by approximately 6% since the end of 2007.
Please turn to slide number 21. The development services business continues to maintain an active development program.
At the end of the second quarter of 2008 in-process development and investment totaled $6.2 billion, unchanged from the second quarter of 2007 and down 5% from year-end 2007. The pipeline at the end of the second quarter 2008 stood at $3.7 billion, up 9% and 37% from the second quarter and year-end of 2007 respectively.
Revenue for the second quarter of 2008 increased primarily due to construction revenue, which also led to a corresponding increase in construction job costs thereby not translating into increased operating income or EBITDA. After adjusting for the impact of purchase accounting on the gains from disposition of development projects, pro forma EBITDA of $2.6 million was $5.9 million lower than the second quarter of 2007, mainly due to higher equity income revenue recognized last year, due to the sale of non-consolidated development assets, which did not recur this quarter.
Gains from projects that had been expected to be sold in the second quarter of 2008 were deferred into future quarters. Please turn to slide number 22.
The global investment management business continued the growth of assets under management. Assets under management totaled $43.7 billion at the end of the second quarter of 2008, up approximately 32% and 16% from the second quarter and year end of 2007 respectively.
For the first half of 2008, we made acquisitions of $3.8 billion and dispositions of $600 million. The purchase of a majority interest in Wood Partners in the first quarter of 2008 contributed another $2.4 billion to assets under management.
Revenue for the second quarter of 2008 of $42.7 million was lower than the prior year comparable quarter by $41.1 million. Fees for assets under management actually increased commensurate with the rise in assets under management, but were offset by a virtual lack of carried interest revenue, down by $24.1 million, reduced incentive fees from separate accounts and slightly lower acquisition fees.
As we noted on last quarters call, both the first and second quarters of 2008 faced a difficult compares on carried interest, which were predominantly realized in the beginning quarters of 2007, but more back end loaded in 2008. Given the current conditions in the investment sales marketplace, the recognition of carried interest revenue for 2008 may be deferred into 2009 and beyond.
EBITDA for the second quarter was negatively impacted by the decline in higher margin incentive based revenues. Compounding the drop in EBITDA was an $11.9 million write-down of two investments, attributable to declining market valuations and a lack of equity income fund liquidations in the current quarter, as compared to equity income of approximately $13 million from such recognized in the second quarter of last year.
Our carried interest detail is shown on slide number 23. In the second quarter, we recognized $400,000 of carried interest revenue.
We also recorded $2.6 million in additional carried interest incentive compensation expense, all of which relates to future periods. Revenue, as of June 30th, 2008 the company maintains accumulative remaining accrual of carried interest compensation expense of approximately $64 million, which pertains to anticipated future carried interest revenue.
Please turn to slide number 24. Excluding the mortgage brokerage warehouse facility and development services real estate loans, which are non-recourse, our total net debt at the end of the second quarter of 2008 was approximately $2.3 billion.
The development services business finances its project with third-party financing sources. The substantial majority of these real estate loans are recourse to the development projects but non-recourse to the company.
As of June 30th 2008, the other debt category on our balance sheet included a non-recourse revolving credit line balance of $46.5 million, related to the development services business. The outstanding balance of real estate loans was $586 million, of which only $2 million was recourse to the company.
The outstanding amount on our revolver at quarter end was $404.7 million. This reflects an increases of $93.5 million from the first quarter of 2008.
This increase in borrowings, combined with the lower cash balance, were primarily driven by cash used for acquisitions, additional payments of 2007 incentive compensation and investments made by the global investment management business. As we progress through the balance of 2008, our focus will be to predominantly utilize excess cash flow from operations to reduce the revolver balance outstanding.
Our net debt to EBITDA ratio at June 30th, 2008, was 2.9 times as compared to 2.1 times at June 30th, 2007. Our trailing 12 month interest coverage ratio was 6.2 times.
Our weighted average cost of debt was approximately 4.1% at June 30th, 2008 versus 6.8% at June 30th 2007. Our normalized internal cash flow for the second quarter of 2008 is illustrated on slide 25.
This metric is derived by adjusting normalized net income for the effective depreciation, amortization, net capital expenditures, cash from the development services net gains that were excluded from the P&L due to purchase accounting rules and the cash component of acquisition-related costs. On this basis, our second quarter trailing 12 month internal cash flow was $369 million.
Due to our limited capital expenditure and working capital needs, our internal cash flow trended to be highly correlated with our net income. For the second quarter, net capital expenditure were $19 million.
We now expect full year 2008 capital expenditures to come in at approximately $70 million. I'll now turn the call back over to Brett.
Brett White
Thank you, Ken and thank you Ray. Please turn to slide 26.
As we've said since late 2007 providing any definitive outlook on 2008 is impossible in this environment. Also, as we have done the past few quarters, we will continue to describe the outcome of our ongoing modeling that provides a range of earnings possibilities for the full year.
As we have said the past few quarters, this is not guidance because we do not have visibility into future quarters, as we would, in a more normal operating environment. However, as we have done the past few quarters we can examine current data and make some educated guesses around the possible performance scenarios.
Our current model assumes the following: no near term recovery in the global credit market, significantly weakened agency leasing and tenant representation activity globally. The realization of carried interest non-investment management business in 2008 will be well below 2007 levels.
And the growth and profitability of the corporate services and facilities management business is not enough to offset the weaknesses in those markets just discussed. Our updated models incorporating a pessimistic view of the state of the global economy, the depth of the capital markets downturn as well as the expected continued softness in agency leasing and tenant representation, now indicate that 2008 earnings per share could be down versus the prior year by as much as 40 to 50%.
As we described previously, this is not guidance, and it's just one possible outcome at this point in time. In late 2007, we implemented cost reductions, and we are currently taking additional steps to reduce our expense levels to better match reduced revenue expectation.
As you have seen in the past, cost cutting and expense management are familiar levers we use in depressed market environment. Our efforts to lower expenses are focused on those cost drivers that can be implemented without harming the future growth opportunities of the company, and that will beneficially impact cost in a meaningful way in 2009 and beyond.
As in prior downturn, we intend to leverage our platform and brand strength to take advantage of these difficult markets. Through aggressive recruitment of key talent and clients as well as a robust, modern [ph] and acquisitions program.
We believe we have derive outside benefits from the recovery in the market just as we did in the 2003 through 2007 timeframe. This thus concludes our formal comments today.
Ken, Ray and I now take questions? Operator, you can now begin the Q&A.
Question And Answer
Operator
Certainly [Operator Instructions]. First question comes from the line of Will Marks of JMP Securities.
Please go ahead.
William Marks
Good morning, Brett, Ken. Question on the...
on the Investment Management business. I may have missed this but, on the green part of the table, it looks like the regular investment management fees have dropped Q2 versus Q1 and that's not just based on assets under management or equity under management.
Can you clarify that?
Kenneth Kay
Yes, the overall the fees for assets under management have increased commensurate with the growth in assets under management but I am looking at the slide right now but --
William Marks
22
Kenneth Kay
Yes the... from an appearance standpoint it looks like they are down but they are not...
in reality they're not. What else is included in there are incentive fees, as well as acquisition fees.
And so the fees for assets under management have actually grown, but it's the incentive fees that are down and the acquisition fees that are down obviously as a result of the market place.
Brett White
So Bill, what we will do when we portray our Investment Management Business is, we try and separate it out for you, the carried interest component of those revenues separately and then we bolt together under basically both the annual fee we are paid for assets under management but also the small incentive fees we get for acquisitions and dispositions. So in this quarter, I believe for this year this has just been little acquisition disposition fee.
That line is down, but as Ken mentioned the fee we were paid for assets under management is actually up for the quarter and year-over-year.
William Marks
And is it safe to say that the majority of the $42 million of the investment management fees were based on assets under management.
Brett White
Yes.
Kenneth Kay
Yes.
William Marks
Okay and one other question, big picture, with your changes you mentioned with the... could be as much as 40% to 50% decline in earnings, can you tie that to a drop in margin, I think in the past you had said it would be a pretty fast in the year [ph] for the margin to drop 200 basis points from last year which I think last year was about 16% EBITDA margin on a stabilized basis.
Brett White
Right, and I remember, Ken talked you specifically about what we're seeing margin declines only set the stage for that. What we have in this marketplace is at least in this industry at the moment is a classic stagflation type environment, we're heading two separate head winds, but those head winds had both the primary drivers that really provide growth to this industry, first is the health of general economies which provide lift for the leasing business and second the health of capital markets, which provide lift for obviously our capital markets business.
In most downturns what you see is, while there may be a overlap of a quarter or two where both were down in most downturns and Ken talked about this in his prepared comments, as the economies heat up and you see strong leasing, Fed comes in, raises interest rates and that impacts the capital markets down. Conversely, when the economy is soft, the Fed comes in, lowers interest rates and that's put fuel in the capital markets.
We're in one of those fairly and thanks goodness unique scenarios where you have both drivers negatively impacted and we've talked about in the past and I think you probably heard us talk about. The worst environment for this industry is a stagflation type environment and while we're not technically...
if you listen to the economist, not typically in a stagflation environment for all [indiscernible] and purposes for this industry we absolutely are. So the margin decline we've always talked about is the 100 or 200 basis points assumed a normal downturn cycle.
This is not by any means a normal downturn cycle and this exacerbates the margin decline. But Ken you...
you might reiterate what you mentioned just a moment ago in your prepared comments.
Kenneth Kay
Yes I mean when we were talking before we said that the margins would be down in the range of 300 to 400 basis points. As compared to what Brett mentioned it was 150 or 100 to 200 basis points, that we talked about before and obviously what's driving that is the reasons that Brett mentioned and also that the impact some of these markets have on some of the incentive based revenues for instance the carried interest revenue and potentially the gains from the Development Services business.
So those are the things that end up driving it to a steeper reduction in the margins and then just to reiterate would be in there that 300 to 400 basis point range.
William Marks
Great. Thank you, there.
Operator
Okay, thank you. The next question comes from the line of Robert Reik, [ph] William Blair & Company.
Please go ahead
Unidentified Analyst
Good morning, guys.
Brett White
Morning.
Unidentified Analyst
When you talk about taking some cost out of business, what your expectations for sales to slow, leasing to slow, you assume that the compensations can be a part of that, Brett can you touch on the differences around the various geographies that might prevent that from happening and how much of head wind that is?
Brett White
Sure I would say that in the context of the overall industry we have some good advantages in our ability to get our cost. We can move on both discretionary operating expense which is something we do frequently when the markets are constrained and our compensation system both in terms of management bonuses and comp and in terms of incentive compensation for our sales [ph], we have...
the systems that we use, the compensation plans we use move very quickly down as revenues come down. So most of our sales people [ph], [indiscernible] around the world are on some sort of a commission program, even the proper share programs that we use in some jurisdictions in Europe behave a lot like a commission program does move greatly with expense and as I mentioned on the management side, the way we handle compensation here is as we move down on the EBITDA line, management compensation moves down as well.
So I guess where I would respond to your question is, we don't feel we have any headwinds that constrained us from realizing what are really pretty significant reductions in OpEx both on discretionary OpEx and on compensation around our [indiscernible] and management.
Unidentified Analyst
Okay, okay, great. And then looking at the mix in Asia Pac, is that still predominantly transaction oriented and then if you could touch on any kind of margin expectations for that region.
Brett White
The mix in Asia Pacific is definitely... the revenue and EBITDA mix is definitely skewed towards transactions.
We do have a very significant management services and corporate services business in Asia Pacific. However those are relatively low margins and so our Asia Pacific business, yes is definitely skewed towards the transactions, that have been said that you saw in the result of this quarter and you've seen for a number of quarters now it is very profitable business for us and it's had really terrific...
I think performance over, now a number of quarters as that business grows and matures. Ken, you want to talk at all about margins for Asia Pacific.
Kenneth Kay
No I mean I think with the head win coming from the marketplace there's a potential for the margins to be impacted somewhat in Asia Pacific and it's a little bit early to tell in terms of where those settle in. I would think that the Asia Pacific segment would be the least impacted if you will from the margin decline perspective only because of inherent growth in the local economy there.
But given the fact that we've seen some softness in the investment sales areas and some potential head winds on the leasing front, as well. I think just vis-à-vis the prior year we will see a little bit margin although less than probably what we would see in EMEA and the America's.
Unidentified Analyst
Great, thanks guys.
Operator
Okay, thank you. And the next question comes from the line of Anthony Paolone of JPMorgan.
Please go ahead.
Anthony Paolone
Thank you, and good morning.
Brett White
Good morning.
Anthony Paolone
I'll start with your Investment Management Business, can you give us a sense as to what run rate EBITDA would be like, if you just stripped that down to base management fees on the $44 billion odd billion of AUM?
Brett White
No, we really can't, because we're... as I said we include in our base management fee certain incentives that surround the business.
And we don't break out what our run rate even number would be. And I would tell you that in our investment management business, the bulk of our profits in that business come from the various incentive fees that we earn.
And you've seen that now through the first half of this year, when we're not trading in that business and we're doing very little trading at the moment. The incentive fees are few and far between.
As soon as trading resumes there, of course those come back through in a more normal fashion, but no we don't break out and can't break out the EBITDA for the base management fee.
Anthony Paolone
And then thinking about where those might go in the next 12 months or so, given the rates kind of backdrop of about 50 to 100 basis points in cap rate back up yet to come, how much of some of that carried interest or promotes or incentives are relative to benchmarks versus it's just [ph] an absolute hurdle
Brett White
Right, the incentive fees that we earn in investment management business are.. and there's different incentive structures in each of the funds.
But generally speaking, those incentive fees are over a hurdle that is set at the outset of the fund. So what you see happen in a market like this is two things.
First, as the market has been extremely volatile, the last six, seven months the investment management teams have really been out of the market in terms of active trading. Now that's beginning to change, and I think as each month goes by and there's better visibility into where values are going to settle out you should see increasing velocity of transactions occur in that business and new business overall.
And that's how I would characterize how we see that business at the moment. But in terms of trying to speculate about where the businesses are going to be in the short term, it's just hard to say.
Those investment management teams are making decisions every day, based on the marketplaces they see. And I would tell you that in all the funds that are vintage at least two or three years old, there are significant incentives fees built into those funds, with the value declines we've seen already.
And I should also make the point that Ray is looking at the cap rates as tracked by the entities out there in the marketplace to do this sort of thing. I would tell that in the investment management business and in the trading business, in capital markets we think we're seeing...
we tend to see the cap rates move before it's picked up in this data. We...
when cap rates were reported to be basically flat last quarter we were seeing trades where that was absolutely not true. So I would tell you that in a marketplace as a whole the trades that are occurring right now in the States and in Europe, value declines are well built and in most cases are, something between probably 10 and 20% already built into the trades that are occurring in the marketplace.
And with those value declines in place, these promote fees that we have earned in investment management funds are still quite significant.
Anthony Paolone
Okay, that's helpful. On the transactions and on the asset sale side, the U.S.
market, CMBS market here is creating logjam. Can you contrast that with what's happening abroad in the commercial real estate debt markets that you see other parts of the world either ahead of U.S.
or behind it in terms of what's happening on that side?
Brett White
I think what I would characterize that, is that well this all started as a U.S. credit market dislocation.
As we sit here today what you have is a global capital markets dislocation. So because of that...
and Ray, I thought, spoke of this very well, really what exists in the marketplace right now is a large bid/ask spread on the asset class. So while the credit markets...
one could argue the credit markets might be a bit healthier in the UK than they are in the States or a bit healthier in the Netherlands than they are in UK, these are rounding areas. The real fundamental issue in the market today...
the capital markets is that globally buyers now believe that the asset class should be discounted by 7%. Sellers believe that the asset class should be discounted by a lesser percent.
Now when buyers and sellers can find some common ground trades occurring or are trades occurring but that bid/ask spread has been very significant in the past six, seven, eight months. We believe that, as it always has before, that bid/ask rate is going to settle and narrower, when you are going to see velocity trades suddenly increase.
But at the moment, it is significant, it's significant in all global jurisdictions. You saw in Asia Pacific, you saw in EMEA and you saw in the States.
Barring declines in the capital markets businesses, the US being the worst, UK is in the mid 30s down year-over-year and seems to be hanging right about there, Asia Pacific a bit less. So I suppose the specific answer to your question is U.S.
is a bit worse than the others but when we look at it, is there's just a general strong headwind on investment property trades globally. And that's going to remain in place until the credit markets stabilize.
At the moment, they are not.
Anthony Paolone
Okay and then this last question on your outsourcing business you added, I think it is 11 new accounts in 1Q and 5 in 2Q, is the drop off in 2Q just kind of how the numbers came out or is that getting more difficult there?
Brett White
No, it is not getting more difficult. In fact, our win rate right now is about 67% of all the major GCS proceeds, we're making...
we're winning almost 70% of those proceeds. It's just the way the accounts came in the second quarter, and I think you'll see for the full year and certainly for year-to-date that business is...
you would expect, that business is doing exceptionally well. Our platform for integrated occupier management is unsurpassed in the industry.
We're seeing terrific momentum in that business. And we expect to see a very, very good growth in that business going forward.
Anthony Paolone
Okay. Thanks you.
Brett White
Sure.
Operator
Okay. Thanks you.
[Operator Instructions]. We have a question from the line of Sawn Bolen [ph] of Goldman Sachs.
Please go ahead.
Unidentified Analyst
Good morning. A question for Ken.
I'm sorry if I missed this before, but on the $11.9 million write-down on the two assets and the investment management segment, could you give us a sense of when those assets were purchased and what your level of investment was?
Kenneth Kay
Well, yes we had write-downs, one was about $7.5 million and one was $4.4 million something along those lines. Of the $4.4 million investment, it was total of about $8 million to begin with.
That investment had been made probably, I would say four years ago or so. Of the $7 million the investment is probably in $30 million range approximately and that investment probably was made I would say about three years ago.
Unidentified Analyst
Okay, and what... was it more asset revenue drive or was it a particular market at the world or?
Kenneth Kay
Well they, both of them were international. One was actually in Japan, one was in the UK.
And both were really driven by declines in values, kind of consistent with what you've seen in the US. And we...
as a result of the fact that kind of watching the decline in values felt that we needed to take a write down on those. It's possible that those values come back over time but the accounting kind of pronouncements dictate that once you've seen those size down by six months or so and they've kind of been in excess of a certain percentage range, you just have to take a write down of it.
So obviously non-cash we'll watch them, we still think that we've got some very strong investment opportunities, potentially could bring those back. But based upon the accounting guidance we had to take a charge-off this time.
Unidentified Analyst
Okay. And then sort of along the same lines with $105 million you had co-invested as of the end of Q4.
Are those over the... a similar timeframe that that money's been invested or how should we think about potential write-downs within that pool of assets?
Kenneth Kay
Yes well I mean those... the $105 million is probably over...
let me... let's call it maybe a five or six year timeframe.
Everything has been reviewed and assessed from valuation standpoint. And at the present time we don't see any additional value declines.
Obviously with the fluidity in the market situation, we'll continue to watch that each quarter. But we've gone through all of those investment values and feel that they are appropriate to say that these were the only two that required a write-down.
Unidentified Analyst
Okay. Thanks, that's helpful.
And then on the acquisitions for the year, you've done $135 million I guess thus far. Could you give us a sense on the $152 million of revenues, worth an EBITDA margin on those assets...
those acquisitions would be?
Kenneth Kay
Yes. We don't specifically get into the EBITDA margins for each one of the businesses that we do.
But I can tell you that the margins of the businesses that we have acquired are typically at or above the consolidated margins for the company. And when I say that, I just go back to the kind of consolidated margins for the company before we got into this downturn situation.
So this is pretty favorable from the standpoint of being margin accretive to us, once we do those transactions, of course. They are smaller, so there's a modest amount of cost savings that comes with those unlike some of the larger acquisitions we've dome where we generated some very large net expense synergy savings.
These are very modest ones. So they are really I would say margins that are consistent with just kind of the normal operations of those businesses.
And as I said they are typically at or above what our historically even margins have been
Unidentified Analyst
Okay. And then I am online with Jay too.
And I think he got a question
Jay Habermann
Good morning guys. I missed the beginning of the call and I apologize for that.
But in the past you have talked about EBITDA margins and being able to sustain those margins even in a downturn. And I was just curious, Brett or Ken, your thoughts on where the company...
how you're right sized for the current environment in terms of head count and obviously you mentioned sort of tighter cost controls. And if you could just give some thoughts there, that will be great.
Brett White
Hi Jay. This is Brett.
I'd say a couple of things first. You may have missed...
and so I will give it to you... you may have missed the question.
Will Marks said earlier about margin decline, and we talked about in this particular cycle, we could see a margin decline we think is of as much as 40 basis points. The reason for that and why it's exacerbated from a typical market decline is that we are in a unique environment right now.
This environment to us at least in this industry is a classic speculation environment but we have a capital markets dislocation... severe capital markets dislocation along side global downtown on an economic basis.
So that's going to have a particular impact on margins. In terms of how the company right-sizes, I think one of the things that you know and I think most of our investors and analysts know is that this company...
we're known for a lot of things. One of the things we're most proud of is that we have shown the marketplace many, many times before that this management team, and we've all been through these cycles through many times before.
This management team knows how to deal with guarantors in the marketplace. And we pull a variety of levers here in the firm to deal with that.
Those include reductions in discretionary operating expense. We have spent a lot of time and energy in the last ten years, reviewing the compensation plans in the company so that management compensation moves automatically down in a fairly significant way.
When EBITDA comes down most of our key owners around the world on a commission structure which is a terrific advantage in a marketplace like this, because their incomes move directly with their revenue production. And that gives us some real advantages.
It allows us to... if we did nothing, if expenses go down significantly from the incentive comp levers that we have, but we don't stand back and do nothing.
We pull these others levers on discretionary expense. They're very significant.
Those by the way have been used by us now for well over a year. And we talked on the last call about the fact that in retrospect the Trammell Crow acquisition could not have been done at a better term.
It not only diversified the revenue base to provide us with a very sticky, large amount of revenues coming through on our large, corporate, institutional, ownership accounts, but also as we do in any large acquisition we move very, very aggressively on expense. We talked to you for the past year and a half about gross expense reductions associated with the Trammell Crow acquisition of well north of $100 million.
So we went into this particular downturn having just completed... if you could look at it this way, the deepest cost reduction in the history of the firm because of the Trammell Crow acquisition, the downturn hit, we went back at it again and have made additional very significant reductions in discretionary operating expense.
And we'll be talking, I think, a lot more about those and in some detail about those, at the end of the third quarter we can count them up and give you folks some better numbers around what that all means. But Jay, the way I would describe at the moment is we are very comfortable that the company is positioned correctly for this market downturn.
And as difficult as this market is, and it certainly is difficult, as I said before, this management team has been through downturns... severe downturns before.
And what we know from prior experience is it is exactly these downturns that have provided us the greatest opportunities to grow the business. And we are taking our perspective right now.
We see opportunities in this marketplace that are unique, and we want to make sure that we exploit those opportunities because they may not come around for some time. And that's a balancing act but I think we've got that following up very well in the end.
Jay Habermann
Okay, and as you think about uses of capital obviously you've talked about paying down debt, I think $1 billion Ken mentioned at the investor day, over the next several years. Is that still a realizable target?
I mean given this credit downturn has persisted longer than people have initially expected and this could persist into mid next year or even further?
Kenneth Kay
Yes, well our focus obviously in debt reduction, we've got a revolver balance that we want to pay down between now and the end of this year and then going to 2009, 2010 we've got some scheduled payments on our term loans. And it's our intention to make those payments as they come due.
And the bulk of getting to that amount that you mentioned was coming from the reduction of the term loans, it's our intention to do that on a timely basis.
Brett White
Yes, I would say Jay, that, it's Brett again, as we look at the business right now, our use of cash is a very important discussion because I mentioned there are opportunities are out there that we believe are unique and we're seeing those right now in the marketplace. So, it's almost kind of counted too [ph] but if you look at our in field M&A strategy so far this year, it's on a record pace and we see more opportunities going forward not fewer, so we are...
I don't think we can even begin to tell you what at the end of two years from now, what our uses of cash will have been but I can certainly predict that we're going to see a decent leading as our uses of cash going towards acquisitions of key talent and if we can make it happen, acquisitions, there are some firms out there, they're feeling some extraordinary pressure in the current marketplace. So we want to be opportunistic.
We have the cash that we generate. We are a strong cash flow generator as you know.
And there is some real opportunities in the market place right now.
Jay Habermann
How do you gain comfort making acquisitions, just given that year-over-year notwithstanding EPS could be off 40, 50% and I guess by the same token EBITDA margins might look more attractive but the ultimate question is what is the level of earnings a year from now?
Kenneth Kay
Well, I am not sure I understand what's the direct link between what our earnings are going to do and why we make acquisitions Jay. The way we look at it is, and maybe just the best way to answer it is, in our business what we've learned over many, many years around this company is that you get...
opportunities come to you in the M&A space infrequently. Companies in our business rarely sell, and when they become available or you think they might become available, if you can move on them, what we've learned is that is it's certainly good to try.
We believe at this market place, and I think you have already seen this market, has presented and will continue to present some very unique opportunities, certainly hats off to our good competitor John's Wayne [ph] who certainly took advantage of this market place to purchase the StarBack [ph] company and I think what he had mentioned this was a once in a lifetime opportunity in their view. I think that's right, an opportunity to acquire a company like StarBack or other companies in the market place, just don't come around often.
So what we want to do is make sure we are running the company in a way that we have enough available cash, so we can both make the move on the debt we want to make and also purchase talent and companies that are available on the market place and Jay, when you look at the company, I think what you'll find in this cycle is that we will likely take a more aggressive posture on OpEx than the industry as a whole. That certainly has been true in the past.
One of the reasons we do that is, it's our philosophy that if we can move more aggressively on OpEx and reduce expenses inside the firm, that provides us with dry powder that we can use for other things such as these opportunities that the market is presenting to us right now. That how we think about it.
That's how it's played in the past and at the moment we think that's how this cycle will play out as well.
Jay Habermann
Thank you.
Operator
Thank you. And we have a follow-up question from the line of Anthony Paolone.
Please go ahead.
Anthony Paolone
Thanks. I just had one question.
In the press release, I think you mentioned in the Development Services segment some deferred gains that you were holding to recognize in future periods. I was just wondering if you could give a sense as to how much those are and when you think those might come through?
Kenneth Kay
Excuse me yes, it's Ken, well what we had expected is to recognize some of the gains in the second quarter, that would have offset the decline in equity income. And when we said they were deferred the deferral would be likely towards...
into the next couple of quarters. Although obviously it remains to be seen with this market place, the specific timing of that.
But I don't want to get into the specifics in terms of the... kind of the magnitude of those gains.
There were several projects that we have thought we would dispose off in the second quarter that ended up getting pushed up, likely till later in the year.
Anthony Paolone
Okay so these are actual transactions after gross, not just accounting where you are just going bring it in some later period.
Kenneth Kay
No, that's correct. It's specific disposition transactions that will have to occur.
Kenneth Kay
Okay thanks.
Operator
Okay, thank you. There are no questions in queue.
Please continue.
Nick Kormeluk
Thanks operator and callers. We appreciate your attendance here and we'll talk to you in a quarter.
Thanks.
Operator
Okay, thank you. And that does conclude our conference for today.
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