May 1, 2009
Executives
Nick Kormeluk - IR Brett White - President and CEO Bob Sulentic - CFO
Analysts
Anthony Paolone - JPMorgan Will Marks - JMP Securities Brandon Dobell - William Blair Sloan Bohlen - Goldman Sachs Vikram Malhotra - Morgan Stanley
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the CB Richard Ellis first quarter conference call. At this time, all phone lines are in a listen-only mode.
Later, there will be an opportunity for your questions. (Operator Instructions).
As a reminder, today’s conference call is being recorded. And with that, I would now like to turn the conference over to our opening speaker for today, Nick Kormeluk, in Investor Relations.
Please go ahead.
Nick Kormeluk
Welcome to CB Richard Ellis’ first quarter 2009 Earnings 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. The conference call is being webcast live and is available on the Investor Relation section of our website.
Also available is the presentation slide deck, which you can use to follow along 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. 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 in and possible scenarios for 2009, future operations, expenses, financial performance, performance under our credit facilities and cost savings.
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 Q, in particular any discussion of risk factors which is 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 also includes references to non-GAAP financial measures as defined by SEC regulations.
As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures, which are attached hereto within the appendix. Please turn to slide three.
Our management team members participating today are Brett White, our President and Chief Executive Officer, and Bob Sulentic, our Chief Financial Officer. Also with us for the question and answer session are Gil Borok, our Chief Accounting Officer and CFO of the Americas, and Jim Groch, our Chief Investment Officer.
I would now like to turn the call over to Brett.
Brett White
Thank you, Nick, and good morning, everyone. Before Bob reviews our first quarter results in detail, I do want to highlight what we believe are the most significant actions we took during the quarter.
The current macro environment continues to create significant challenges for everyone operating in our industry. On our last earnings call, we noted that our near-term strategy to meet these challenges would be to aggressively manage operating expenses, to seek an amendment to our corporate debt facilities to achieve greater operating flexibility and to remain in compliance with our covenants, to increase market share throughout the current downturn, and to remain prepared with contingency plans to react to positive or negative changes in market conditions.
I’m very pleased to report our progress on this strategy. With respect to operating expense management, we had previously announced targeted annual run rate savings of approximately $385 million.
To date, we’ve been so successful on our cost cutting efforts. We have now increased our target by approximately $100 million.
Please keep in mind that our current 475 to $500 million target excludes the reduction in variable commission and other compensation expense that automatically occur as a result of the company’s reduced transaction revenues. If this variable expense reduction was added to cost cutting target, it would significantly increase the company’s total savings.
In the short run, our cost-cutting efforts significantly improved the company’s prospects for profitability. In the longer run, we believe these cuts will prove to have created significant operating leverage in our business.
Therefore, the changes in market conditions allow us to achieve revenue growth. We would expect to experience higher growth rates in our profitability.
In addition, during the first quarter, we obtained an amendment to our credit agreements. Bob will provide greater detail later in the call.
However, I will tell you that by obtaining this amendment, not only do we increase our cushion in the agreement’s key financial covenants, we also obtained much greater flexibility to either repurchase, refinance or renegotiate the debt under this agreement. As anticipated, the spread we are required to pay to the lenders was increased under the amendment.
We expect the effective interest rate for 2009 to be similar to our actual 2008 rate due to the decrease in LIBOR from a year ago. We continue to our efforts to increase market share as both producers and clients migrate to higher quality services platform in difficult times.
And we believe our efforts are succeeding. For example, in investment sales, we once again captured the number one position in the U.S.
with a share of 17.1% as compared to 14.2% in 2008, according to Real Capital Analytics. In addition, the International Association of Outsourcing Professional, IAOP, has announced its top 100 global outsourcing companies across all industries for 2009.
I’m pleased to announce that CB Richard Ellis is the highest ranked commercial real estate services company and is ranked eighth overall with the likes of Accenture and IBM. While we are pleased with the progress in implementing our strategy, global economic conditions continue to create significant challenges for all areas of our business.
The most significant macro factors directly impacting our business include weak global economic performance, de-leveraging of the global financial system, continuing job losses, corporate bankruptcies, corporate consolidations driven by distressed company sales, capital spending reduction, declining absorption, increasing vacancy rates and declining rental rates, weakening of fundamentals across most businesses, and finally, of course, tough lending conditions. Since second quarter of 2008, these factors and their corresponding impacts on commercial real estate have negatively impacted our revenues across most of our lines of business, and across all geographies.
However, in comparing our financial performance in the first quarter of 2009, against the prior year’s first quarter, you should note that the impact of the global economic downturn had not yet resulted in significant revenue declines for the company in the first quarter of 2008. In fact, our first quarter of 2008 revenues were up slightly over the previous year’s first quarter.
As we look at our first quarter results, I would note that operating expenses declined 29% over the previous year’s first quarter. Given the previous year’s strong first quarter, 28% of revenue decline Q1 2008 was in line with our expectations.
Sales and leasing revenues continue to establish significantly across all geographies and we do not forecast any significant improvement in the near-term. All of our other businesses are performing relatively flat when compared to the run rate performance seen in the first quarter of 2008.
Although I will not run through the details, we have attached slide five providing certain U.S. market statistics to illustrate just how challenging vacancy absorption and cap rate trends has been, and are projected to be through the rest of the year.
The transactions listed on slide six represent just a sampling of the transactions we completed in the first quarter. Despite much lower activity levels on the transaction side of the business, in the U.S.
alone, we still closed almost 600 sale transactions and negotiated about 5,500 leases during the quarter. I’ll now turn the call over to Bob Sulentic, our Chief Financial Officer.
Bob?
Bob Sulentic
Thank you, Brett, and good morning, everyone. Please advance to slide seven.
Revenue was $890.4 million for the first quarter, down 27.7% from last year, driven predominantly by weak sales and leasing activity. Normalized EBITDA came in at 54.1 million or a normalized EBITDA margin of 6.1%.
The biggest contributor to the decline in adjusted net income and earnings per share was a drop in revenue and resulting lower margins. Cost of the services was down materially, but as percentage of revenue rose to 62.2% from 57.2% in the first quarter last year.
This increase was primarily driven by a shift in the mix of revenues with outsourcing, including reimbursables comprising materially greater portion of the total. On a percentage basis, operating expenses of 306.2 million declined further than revenues driven by the implementation of our very effective cost reduction actions.
These actions should create tremendous operating leverage when the market turns. I’ll cover this in more detail later.
Please turn to slide eight. As mentioned earlier, total revenues increased by 28% in the first quarter from the prior year first quarter.
Our property and facilities management business accounted for 44% of total revenues, up from 35% in the fourth quarter. The decline in leasing has accelerated to 32% in the quarter, with this business line representing 30% of total company revenue.
This decline was representative of the challenging economic conditions being faced around the globe. Sales revenue dropped to 78 million and represented 9% of our total company revenue.
The year-over-year decline of 66% was similar to the percentage decline experienced in fourth quarter of 2008. The Appraisal & Valuation business declined by 28% in the quarter, and comprised 7% of total first quarter 2009 revenue.
Global Investment Management revenue was down 14% year-over-year, while Development Services revenue was down 24%, and the Commercial Mortgage Brokerage business was down 33% as the challenges in the credit market continue. Please turn to slide nine.
Outsourcing revenues for the first quarter declined 4% on a year-over-year basis. This decline was driven in part by lower reimbursable costs and project management fees as our outsourcing clients focused on lowering both costs and capital expenditures in their businesses.
Despite this decline, although our square footage managed grew slightly in the first quarter of 2009 and we continue to have significant success winning new business and expanding mandates with our existing clients. Examples of this, we’re being named by France Telecom as a preferred provider for transaction management, and securing a five-year contract with PepsiCo to provide transaction management services exclusively in the U.S.
and on a preferred provider basis in other parts of the globe. Our Restructuring Services Group contributed favorably to results in this quarter with wins for managing, valuing, leasing and disposing of distressed assets.
Please turn to slide ten, transaction activity in the U.S. investment sales market weakened further in the first quarter of 2009.
Market wide transaction consideration fell approximately 80% compared with the first quarter of last year and totaled just $9.2 billion according to Real Capital Analytics. As Brett noted, in a highly constrained market, CBRE held the number one position with a 17.1% market share, up from 14.2% in the first quarter of 2008.
Our Americas sales revenue for the quarter declined 70% on a year-over-year basis. This compares to a decline of 49% for the full year 2008 and 62% in the fourth quarter of 2008.
Revenue for CBRE’s Americas leasing business declined 32% in the first quarter of 2009 versus prior year. This compares to an 11% decline in leasing for the full year 2008.
The U.S. office vacancy rate increased by 70 basis points in the first quarter of 2009 to 14.7%.
Please turn to slide 11. Our investments sales activity in EMEA declined 52% in the first quarter of 2009 relative to the first quarter of 2008.
This compares to a 47% sales decline for full year 2008. The total value of investment transactions recorded in the first quarter in Europe fell to just over 11.5 billion euros or $14.9 billion, a 72% decline from the total for the first quarter of 2008.
Almost all of Europe was affected, but it was notable that the decline in the U.K. was less than the market average decline at just 62%.
CBRE’s revenue from leasing in EMEA declined 33% in the first quarter versus the same quarter in 2008. This compares to only an 8% leasing decline for full year 2008.
Leasing market conditions throughout EMEA deteriorated over the first quarter of 2009, as significantly weaker economic conditions led to caution regarding real estate commitments, as well as the increases in the availability of surplus space. Please turn to slide 12.
CBRE’s sales revenue in the Asia-Pacific region fell 69% in the first quarter of 2009 versus the prior year first quarter. This compares to a 40% sales decline for the full year of 2008.
Although interest in acquiring quality assets in Asia-Pacific remains strong on the part of long-term investors as new funds continue to be established. The persistence in the global credit crunch, uncertainty of the market direction and significant bid offer price gaps continue to deter major investment activity.
CBRE’s leasing revenue in Asia-Pacific fell 33% in the first quarter versus prior year first quarter. This compares to a 6% increase for the full year 2008.
We have started to see a pick up in activity in China following the Chinese New Year in early February, as a result of the government stimulus and we’re hopeful that this trend continues to build. Please turn to slide 13.
Revenue for the Development Services segment was down 25% to 20.9 million in the first quarter of 2009. Operating results for the first quarter of 2009 improved due to our cost-cutting efforts.
The results included the one-time expenses in the amount of $800,000 associated with these cost containment efforts, as well as net write-downs of impaired assets in the amount of $900,000. At March 31, 2009, in-process development totaled $5.4 billion, down approximately 14% from a year ago levels.
The pipeline at March 31, 2009 totaled $1.5 billion, down approximately 46% from the year ago levels. The combined total of $6.9 billion of in-process and pipeline activity is down 24% from year ago levels of $9.1 billion.
Our core investment in this business was $96 million at quarter end. There continues to be a very low level of activity in the development business and this is not expected to improve in 2009.
Please turn to slide 14. Global Investment Management revenue was $37.3 million for the first quarter of 2009 as compared to $39.5 million in the first quarter of 2008.
The decline resulted from a reduction in acquisition, disposition and incentive fees as compared to the first quarter of 2008. Asset management fees were up for the quarter to $33.6 million versus $32.8 million in the first quarter of 2008.
Assets under management totaled 36 billion at the end of the first quarter of 2009. This total was down 6% from year end 2008, reflecting a drop in property values globally, as well as negative foreign currency impact.
Our assets under management are down 18% from a first quarter 2008 peak of 43.7 billion, driven by the decline in commercial real estate values. Co-investments at the end of the quarter totaled $67 million.
Our Global Investment Management EBITDA reconciliation detail is shown on slide 15. EBITDA was impacted by a net cash write-down of investments of $5.2 million attributable to decreased property valuation.
In the first quarter of 2009, we did not realize any carried interest revenue and we reversed 3.1 million of previously accrued carried interest compensation expense as compared to the first quarter of 2008, in which we accrued $5.3 million of carried interest compensation expense. As of March 31, 2009, the company still maintains a cumulative accrual of carried interest compensation expense of approximately $20 million, which pertains to anticipated future carried interest revenue.
This segment’s EBITDA margin in the first quarter of 2009 was adversely impacted by a catch-up depreciation expense adjustment reflected in equity earnings. Please turn to slide 16.
As market conditions have weakened, we’ve continued to aggressively attack costs in our business. To date, the actions taken, while difficult, have been necessary and correspond to lower levels of activity across the enterprise.
These reductions have been executed so as to not put our ability to serve clients at risk and to position us to participate fully when the market turns positively. Franchise preservation is the key reason these reductions have taken multiple quarters to both identify and implement on a worldwide basis.
Relative to the first quarter of 2008, operating expenses this quarter were down 29.2%, representing a larger decrease than the drop in revenue, which was 27.7%. I’ll now hit a few highlights.
On our previously announced 385 million cost savings plan, all actions have been implemented. We are now raising this target by approximately $100 million to achieve between $475 million and $500 million in total annual savings versus 2007.
Of this amount, roughly $435 million will flow through 2009 results versus the 2007 base year. These are changes to operating expenses that are in addition to variable expenses or commission expense declines that result from lower revenue.
To achieve these savings, we incurred $7.9 million of one-time cost containment expenses in the first quarter, and $35.3 million of cumulative one-time expenses over the trailing 12 months. We’re remaining frugal with CapEx spending, and anticipate 2009 CapEx will be approximately $30 million, or about $50 million below our 2007 annual spend of around $80 million.
Please turn to slide 17. We are very pleased to have successfully amended our credit agreement just before the end of the quarter.
You may have seen press release we issued on the amendment on March 24th. Today we want to cover some of the highlights.
We increased our leverage ratio covenant to 4.25 times from 3.75 times and reduced our interest coverage covenant to two times from 2.25 times for eight quarters. Importantly, we are now able to add back up to $225 million to covenant EBITDA due to the cost containment actions we are so focused on.
Up to 75 million of this amount is based on trailing 12-month one-time cost containment expenses. On a trailing 12-month basis at the end of the first quarter of 2009, the actual add back was $35.3 million.
And up to $150 million can be added back for actions taken on run rate savings where the savings have not yet been realized. The amount available for add back in the first quarter of 2009 was well in excess of the $150 million cap.
As a result of the amendment, we are now able to buyback our term loans at a discount, subject to some limitations. And we are also able to make loan modification offers to existing debt holders.
We prepaid $105.5 million of our outstanding term loans. This covers what would have otherwise been paid in March and June.
Under the amended terms of our credit agreement, the effective interest rate for 2009 will be similar to our actual 2008 interest rate, despite the new higher spreads. This is true due to the fact that LIBOR is lower this year than last.
Without the amendment, our 2009 rate would have been lower than the 2008 rate. At 03/31/09, our revolver in term A loans were both at LIBOR plus 3.25%, and term loans A1 and B were at LIBOR plus 4%, both with a LIBOR flow of 2%.
This resulted in an average rate at the end of the first quarter of 2009 of 5.6% before accounting for [SWOT]. On slide 18, we’ve illustrated our new financial ratio covenant requirements and debt maturity schedule through 2010.
As you will notice, our leverage ratio, which is the net debt to EBITDA, at the end of the first quarter provided us with substantial room under the new maximum ratio permitted of 4.25 times. This leverage ratio at March 31, 2009 was 2.78 times as compared to 3.28 times at December 31, 2008.
Our trialing 12-month interest coverage ratio was 5.89 time. Please turn to slide 19.
Excluding the mortgage brokerage warehouse facility and the non-recourse development services real estate loans, our total net debt at the end of first quarter of 2009 was approximately two billion. This represents a 2% increase from year end 2008 or $47 million increase.
Our revolver balance increased in the first quarter of 2009 as we prepaid $105.5 million in scheduled amortization on our term loans. Paid the fees associated with amending our credit agreement, and made draw-downs in anticipation of paying 2008 incentive compensation early in the second quarter of 2009, as well as to fund some seasonal working capital requirements.
In connection with the amendment, the company incurred $29.3 million write-off of the financing cost in the first quarter of 2009, of which 11.1 million related to the amendment fees incurred. I will now turn the call back over to Brett.
Brett White
Thanks, Bob. And if everyone, would please turn to slide 20.
Market conditions continue to make it unrealistic to attempt to provide any specific earnings guidance for the business. As it relates to macro trends that will impact results for remainder of 2009, we believe the following; for investment sales, while our expectations are low, but sales may pick up towards the end of the year.
Leasing activity will stay weak until we start to see recovery in economic performance and meaningful job growth. Our Outsourcing business will continue to see growth in client base, but will be challenged by the macroeconomic headwinds described earlier.
We also continue to believe the Global Investment Management and Development Services business will have muted results until investment sales pickup. Given these expectations, our strategy remains consistent.
We’ll focus on providing great service to our clients, we’ll continue to aggressively attack cost for the duration of the downturn, we’ll focus on improving our balance sheet aided by the increased flexibility afforded by our credit agreement amendment, and we’ll aggressively compete for market share. We, of course, know that the commercial real estate market will turn.
And when it does, the actions that we have taken to preserve our geographic presence and services offered, together with a reduction of operating expenses, will enable us to disproportionately grow market share and earnings versus the rest of our industry. Until the overall market improves, we believe our largest opportunities will exist for our businesses that focus on outsourcing, trust property management, asset restructuring and disposition, and within certain areas of Global Investment Management.
I’d like to thank our people for their tremendous support, incredibly hard work and tireless efforts over the past year. Our employees have remained focused on generating the best results possible, are being asked to dramatically reduce our operating expenses, and our people that drive CBRE’s success that will extend our market leadership position.
Operator, we’d now like to take questions.
Operator
(Operator Instructions). Our first question comes from the line of Anthony Paolone with JPMorgan.
Please go ahead.
Anthony Paolone - JPMorgan
You’d alluded to your operating margins being weaker for a couple of reasons. I was wondering if you could just elaborate on that, your gross margins, and what needs to be done to get those back up into the 40s where they’ve run historically?
Brett White
Sure. Anthony, this is Brett.
Let me just make a few general comments and I’ll turn the question over to Bob, who’ll hit it specifically. But the two points I’d make, Anthony, first of all, what you are seeing in margins in our business late last year and early this year is primarily a result of mix.
So as you see the precipitous decline in transaction activity globally, which are traditionally higher margin businesses, you are now seeing a much higher [rating] of revenues in the 40% range coming from the outsourcing businesses and these are lower margin businesses. That’s the main story.
And before I turn it over to Bob, I would like to make a point about margins. Our margins may have been a bit lower than you expected, and I read that in your report last night, do keep in mind, our margins are materially higher than any competitor we have in the business.
And we think we do an exceptionally good job of managing the business to produce profits and not just revenues. So with that comment, Bob, I’ll let you answer the question on gross margins.
Bob Sulentic
Thanks, Brett. And Anthony, Brett hit the high points.
There’s really two things. Number one, in our cost of services, there is an element of fixed cost even though there is large variable cost tied to production in those numbers, and that’s for our transactional businesses, there is an element of fixed cost.
And then, secondly, as Brett said, we now experienced at the end of the first quarter that 44% of our revenues were our management businesses, which were by far the most stable revenues and we’re very-very glad they are there at this point in the market cycle, they do operate on different margins than our transactional businesses. Our view of this is we want to see those margins come back up, but we think that being where we are today is indicative of the fact that we’re going to have great opportunity for operating leverages as things turns around.
Anthony Paolone - JPMorgan
Okay. And what kind of EBITDA margin did facilities management run at in the first quarter?
Bob Sulentic
Around 10%.
Anthony Paolone - JPMorgan
Okay. So does that then suggest that some of the other big segments like leasing and sales like lost EBITDA?
Bob Sulentic
We don’t think any of our segments lost EBITDA, but they certainly operated at lower margins, again given the fixed cost element associated with them.
Anthony Paolone - JPMorgan
Okay. And then, my last question is with respect to the balance sheet, looking out of over the balance of this year and even into 2010, where you’ve got some principal repayment and just thinking about where your EPS level seems to be penciling out in this downturn, how do you put some parameters or give us some comfort that you have capacity to meet your principal payments and also, not necessarily tripped any covenants as you look forward given just how depressed EBITDA is getting?
Brett White
Sure. Again, it’s Brett.
I’ll will start with a general answer and turn to Bob to give the specifics. Couple of points I’d make, Anthony.
First of all, we believe that in 2008 and the first quarter of 2009, EBITDA we produced in the business exceeded all of our public competitors and our largest private competitor combined. So the first point I’d make is that this company is producing materially and significantly more EBITDA than the industry.
And that will continue to be the case in 2009 when first of the, there will be a very good EBITDA production this year, although the first quarter because of the compare last year was relatively light, as it always is. Second, we have in our finance impact, of course, revolver which has good capacity in it.
We use that in the cash light quarters then repay that back later in the year. I fully expect that this year 2009, a combination of cash generated from the business, and if necessary, a slight contribution from revolver will be more than sufficient to cover all of our financing costs and amortization interest needs.
But, Bob, do you want to add some color to that?
Bob Sulentic
Yes. Again that’s the cash flow from operations and the financing capacity we have today that we’ll certainly call upon.
Anthony, we’re very, very carefully modeling what we think will happen in the components of our business going forward. And with the amendment to our covenants that we recently achieved, we’ve got a lot of flexibility to do things, to raise capital downstream that we didn’t have before.
We have the ability to repurchase debt, we have the ability to modify tranches of our existing credit facility, we have the ability to issue equity or subordinated debt. And in the area of issuing equity, we’re going to be very, very careful obviously.
We don’t want to do anything that’s too dilutive. But we do have some options that we’re studying here.
And as I said, we’re modeling our business very closely. So I think the flexibility that we now have under the amended terms of our credit agreement will give us the maneuvering room we need.
And one of the things we’re not going to do is act too precipitously because financing is expensive. Whether we raise debt or raise equity, it would be expensive.
So we’re proceeding carefully. But we do have the flexibility to address this as it unfolds.
Brett White
I would just add to that, Anthony. Let me be very clear about this.
We have absolutely no plans currently to do either of those things, to either issue equity or hit the subordinate debt market. What Bob’s referring to is in the amendment we added the opportunity to do that, where the markets do deteriorate and get a lot worse and we need to do it.
But at the moment, we don’t expect to do that.
Operator
And thank you. Our next question comes from the line of Will Marks with JMP Securities.
Please go ahead.
Will Marks - JMP Securities
Thank you. Good morning, Bob.
Good morning, Brett. A couple of questions, one is that I was impressed with basically net debt level remaining flat during the quarter.
Were all your bonuses typically paid in the first quarter? Is there any reason why debt would spike up in the second quarter?
Bob Sulentic
Will, good morning. We paid about $200 million of bonuses after the end of the quarter, and just a notable statistic on that, our leverage ratio was 2.78 times.
Had we paid those bonuses in the quarter, our leverage ratio would been 2.9 times. So still at a very, very acceptable level.
And when you run the math on that, you may say, how do you get to that. Part of the cash we used for those bonuses was U.S.
cash and part of the cash was foreign cash. So when you run through the numbers or that’s where our leverage ratio would’ve come out, still a very acceptable level.
Will Marks - JMP Securities
And that would be the ratio as it applies to the covenant, correct?
Bob Sulentic
Absolutely.
Will Marks - JMP Securities
Okay. Great.
And second question, in the past you’ve talked about the cost cutting on the comp line at approximately 600 million as it relates to just natural cost cutting from lower commissions, can you reaffirm that number or discuss it?
Bob Sulentic
Well, it’s difficult to be too precise with that number, Will, simply because, as you know, the commission schedule as you drop down through levels of earnings is not the same at every level. So you can’t be precise.
What we can tell you is, we raised our target for non-commission, non-variable driven compensation to between 475 and 500 million. We’re quite confident that the variable, what you call the natural or automatic, portion will be in excess of that.
It should be nicely in excess of that.
Will Marks - JMP Securities
Okay. And then, as it relates to the new cost, can you refresh us a little bit on the costs here you made?
It is basically a 25% cut from 2007 operating (inaudible), so maybe just comfortable that that’s not going to impact revenues at all, or maybe it will?
Brett White
No. Will, this is Brett.
I don’t expect that these [cost cutting] we made will impact revenues whatsoever. Well, I think it may appear we’ve been extremely aggressive in cost cutting in the sense we have been.
We have a lot experience in this, and this is certainly not the first deep cost-cutting effort this company has been through. In fact, in the last 10 years, it’s probably the fifth.
So we know where to cut the cost, we know how to cut the cost, and it’s something that’s just part of the culture here. So where we reduced costs are in areas that do not have a direct impact on the revenue-facing component of the business.
I think that that should hold through with the numbers. You’ve seen that generally speaking our revenue reductions are less than the market, our revenues are going down and that should imply we’re increasing market share while at the same reducing cost.
And it’s a delicate balance to walk, but we we’re walking it very well at the moment.
Bob Sulentic
And just to add to that, Will, we haven’t exited any business lines, we haven’t exited any markets anywhere in the world, and we think we’ve done a very thoughtful job of paring excess costs out of all the business lines and all the markets in operate in around the world.
Will Marks - JMP Securities
Can you maybe give me say, three examples, of maybe -- you had two office managers in one situation and you got rid of one, or you cut travel in a certain capacity? Just anything would be helpful?
Bob Sulentic
Well, Will, I mean I’ll give you a general answer because we’re talking about a company with 30,000 employees in almost 500 offices around the world. There are literally tens of thousands of ways that you cut cost at a local basis, but it flows through all those lines, Will, and all the others as well.
So, for example, just travel on our team, that line around the world has been reduced very, very significantly from prior year levels. If you look at things such as just the base salary line across staffing, it’s come down significantly because we’ve let staff go and we’ve reduced salaries across the board.
And if you look at money we’re spending for marketing and business promotion, because revenues available at the moment from the transaction businesses are much lower, we don’t need to spend as much in marketing and business promotion. The personnel reductions, Will, generally fall in some fairly straight forward categories.
It’s middle management, it’s back-office staffing, it’s lower producing sales professionals, unprofitable sales professionals, and that’s not a big component of it in the States, but in Europe where they are salaried, it can be. In some cases, we’ve downsized offices and we’ve got some extra capacity there to deal with.
But, Will, it’s in every component of cost and significantly in every component of cost.
Will Marks - JMP Securities
Okay. That’s great.
Thank you for that. I’m going to leave you with one final question.
And that is, you’ve talked about you cut your commissions split slightly and I believe at the lowest level of downturn from 50 to 48%, can you just tell us if you’ve seen any impact on brokers leaving?
Bob Sulentic
Yes. Actually, we did mention that in the call, the commission rates in the industry for the first time in my career came down this year.
And so, we and most of the major competitors out there and some of the smaller competitors dropped commission rates a bit. It is nothing hugely meaningful, but to us because so much of our costs come through the commission line, it does add up, and it gave us nice pickup on cost savings.
But it’s not particularly meaningful for the producer. It’s a couple of percentage points, but it applies across the whole population of producers, it’s not just the low end producers.
And by the way, there was no impact. As far as I know, we didn’t have a single employee walk out of the door for all the obvious reasons; first, [everyone else] was getting commission.
Second, we believe we have the preeminent platform in the business. It’s hard to imagine why someone would walk away and go to a lesser competitive player.
Operator
Our next question then comes from the line of Brandon Dobell with William Blair. Please go ahead.
Brandon Dobell - William Blair
Hi. Thanks.
Brett, I am going to change direction here for a second. It doesn’t seem like the Investment Management business is putting an awful lot of capital work, I think, that’s probably the same across the industry.
But how should we look at that as a proxy for either inflexion point in the business for investment sales, or as a proxy for, I guess, your confidence in the overall direction of the market? Should IM be kind of a leading indicator or is it going to lag for a while as you guys get comfortable with the overall macro?
Brett White
That’s a great question. It should be, I think, a bit of a leading indicator because the funds within that business tend be oriented a little towards value add/opportunistic side of the spectrum.
So that would indicate to me, and I think to you, that they would be out looking for opportunities in this market, distress opportunities, and in fact, they have done that. And so, you’ve seen in the past quarters some fairly significant acquisitions in New York and Houston that they made, the New York acquisition was quite high profile.
And I think was one of the few significant capital markets’ transactions in New York in the first quarter. The viewpoint from the investment management company at the moment is that while we may not be at the bottom or certainly bouncing near it, in their business, it’s not really critical that they time their reentry at bottom.
It’s certainly critical that they time their reentry near it. And so, they are now, I would say, fairly aggressively scouring the market for opportunities.
And I think, you’ll see them as the year plays out pick up more and more properties at good distressed values. We do believe that on the yield side, certainly in the U.K.
yields have probably stopped expanding. Values are still declining because rental rates are coming down.
In the States, I think we’re getting close to that. I think you’re getting about to where yields are going to get to on the top end.
Values, of course, still should coming down a bit because leasing rates are coming down. I think you’ll find that the more aggressive [and sound] investment management firms out there, and we’re certainly not the only one.
You’ll find that, right now, I think those firms believe that the equity they have parked in the sidelines, it’s probably time to start beginning to put that equity to work in a very careful manner.
Brandon Dobell - William Blair
That’s helpful. From a different perspective, you mentioned with the broker split coming down whether it’s the first time you’ve seen, has that same thing happened from a pricing perspective?
Are your customers pushing back on you saying we haven’t lowered commission rates historically for you guys, but given the macro, we’re going to have to do it in investment sales and leasing, or are you seeing any other trends that we should be aware of?
Bob Sulentic
It’s probably counterintuitive, but it works in opposite fashion, Brandon. So, what happens is, in a distressed marketplace such as this one, owners who had empty space tend to pay actually higher commission rates during these cycles then do in very hot cycles where I think lot of owners think that leasing is a little bit easier than it maybe right now.
Same thing holds true on the sales side of the business. In fact, the last time that we saw leasing commission rates increase in last 20 years was a last from down cycle in the early 1990s, where the convention of a commission and a half on large office leases was really introduced.
It never went away by the way. And in this marketplace, we’re seeing commission rates certainly not decline.
If anything, they’re inching up a little bit.
Brandon Dobell - William Blair
Okay. And then, final question from me, in the Outsourcing business, kind of two-part question; first, how do we think about those contracts and how they’re structured in terms of minimums that are truly in place versus how much flexibility the customers have around cutting or adding reimbursable employees, and I don’t know it’s kind of a huge profit impact, but I know it’s a revenue impact for us.
And then, second thing is, did you see an acceleration of that kind of cutting reimbursables trend in the quarter? Just trying to get a sense of how we model that on a sequential basis going forward with a give and take of new adds versus reimbursables going away.
Bob Sulentic
Yes. It’s a great question, again, and it’s something that we’re spending a lot of time on as well.
This market is different than any downturn, obviously than any of us have seen in our business careers. And one of manifestations of this very different marketplace is that we’re seeing for the first time a significant churn in the corporate world.
We’re seeing large corporations go out of business, we’re seeing very large corporations really fighting for their lives. And so, what’s happening here really is two different levers working in opposition of one another.
On the positive side, this very distressed marketplace is forcing corporations, who have never considered outsourcing before, to very seriously consider outsourcing. And we’re seeing a number of very large opportunities begin to enter the marketplace from companies who’ve never outsourced before.
That’s very good news. And that trend which [is going to say] in the industry many, many years is certainly accelerating.
So in the long run what we’re seeing right now is very, very helpful dynamic in the long -term growth prospects for that business. In the short-term, however, there are some real challenges in that business.
And those challenges related around, first, as I mentioned, the consolidation of the corporate world. The companies going bankrupt, companies really in the fight for their life.
When companies go bankrupt, those are clients that go away and that revenue just disappears. Second, companies are slashing costs in a very, very aggressive fashion right now.
And so, what that causes them to do is that we are their third party provider, they’re asking us to reduce the number of reimbursable employees that are being used to service that account. So that’s a reduction in revenues for us and it’s reduction in cost for them.
I believe that that trend, the real pressure on reduction on reimbursable employees, the trend to re-bid some of these contracts, try and get lower pricing, you’re going to see that for the balance of 2009. I suspect that’s not a very long-term trend, but I expect it will take place for the balance of this year.
And certainly, that’s what you saw, and the major firms that do this work, you’ve seen that in their numbers. That although there is a good trend towards any increased volume of business in the outsourcing space, the revenues in this world looked like they were flat the last three months.
And that’s the countervailing dynamic about reduction of reimbursed employees.
Operator
And our next question is from the line of [Sloan Bohlen] with Goldman Sachs. Please go ahead.
Sloan Bohlen - Goldman Sachs
Good morning. First question just sort of a big picture question for Brett.
As you think about leverage, I guess, in the near-term you’re mostly looking at using free cash flow from operations, and potentially it’s more on the line. But when you think longer term, is there a strategy in place, or how do you think about what the appropriate level of leverage in the business is?
Brett White
Sure. Let me go back to Bob’s answer from earlier and reiterate that and maybe some of that some of that may provide some more color.
Sloan, all of this is based on macro modeling. And as we’ve talked about I think great length last couple of years, we are always modeling this business a number of different ways.
We have worse case models, which has seen a significant further deterioration in the market. We have base case models that assume a little bit of improvement in the capital markets at the end of this year, and we’ve got optimistic models, which assume a fairly rapid recovery in capital markets followed by a recovery out of recession fairly soon.
Depending on which model you pick, you would choose the different outcome on balance sheet. So the base case model implies one thing, the downside model implies another.
Certainly, it would be fairly easy for us together to develop a downside model that would indicate that de-levering the company would be a prudent thing to do. If we’re not able to do from free cash available from the business could occur through some of the mechanisms that Bob referenced.
We do have the ability in the amendment to raise equity to pay down debt if that’s necessary. We do have the ability to raise subordinated debt if that’s necessary.
As I said at the moment, we don’t have any plans to do that, but we do have optionality now, and we didn’t have that optionality prior to the amendment. So one of the big news items to us in the quarter is we feel we’ve given firm back the optionality it needs to deal with this issues.
So at the moment, we feel fairly comfortable that in 2009 the cash from operations or revolver, these tools we have will be sufficient to deal with amortization and interest payment. But if the market will deteriorate further or if the market didn’t show any improvement in 2010, we might need to tap in some of those other mechanisms we have available.
There is no doubt about the fact that one way or another in the next two years we intend to do some de-levering. We’re quite hopeful that de-levering will be fully accommodated by performance in the business and cash from operations.
If it’s not, we have other tools now that are available to us in our war chest. Let me ask, Bob, anything you want to add to that?
Bob Sulentic
No, I think you hit it, Brett. If I would add one thing, I would just reiterate what we’ve already said and that is our capacity to generate profit in this business when things start to turn is exceptional.
The positive operating leverage we should experience should be exceptional and we think there maybe a very natural opportunity to de-lever significantly.
Brett White
Yes. I want to add something to that point, because, I think, we talked a lot before the call amongst ourselves of what we thought the big new items were for all of you from the quarter and from the period of time we’re in this downturn.
I think that point is probably to us the most important point about our future prospects. And perhaps the point that gets missed most by our analysts and investors and that is, with the amount of cost we’ve taken out of this business, while at the same time accreting market share that in itself is an amazing thing.
To be able to grow share, retain all of fee producing employees and reduce what now we believe will be in excess of 475 to $500 million of OpEx. A fairly modest improvement to the revenue line, has terrific leverage down to the net income line.
And if you go back and look at our performance in 2002, ‘03 and ’04, even though the leasing markets were deteriorating, we began to onboard products in a very aggressive way. I think the up cycle coming out of here, we onboard products even more aggressively at a higher rate than we did then.
And to give you some color on that, I would very, very disappointed if this firm didn’t materially outpace any of our competitors and our ability to grow profits when you see a bottoming in a mild recovery in this marketplace.
Sloan Bohlen - Goldman Sachs
Thanks. That’s helpful.
And then, just one quick question on Investment Management business, could you remind us of how much equity you guys have to put to use? And then, maybe if you can frame just what kind of return expectations or leverage that equity could use going forward [as the year goes]?
Brett White
Sure. We’ve got about 2 billion on the sideline right now, unlevered.
And it’s a great question, what returns do we look for off that 2 billion? Ironically, you might look for pretty strong returns off that 2 billion, because that money will be placed somewhere near the bottom of a ferocious down cycle.
I really don’t want to quote a hurdle here because I don’t know what they are currently quoting to their LPs. I know the range, but I better not quote it.
But let’s just say that if I had money to place into an investment management anytime over the last five years, I think I’d place it this year. It just seems to me that the opportunity to see outsize growth in values and commercial real estate are fairly obvious at the moment.
And if we have a patient time frame, something in the, I think, four- to six-year time frame, [which those ones had] these ought to be pretty terrific returns.
Sloan Bohlen - Goldman Sachs
Okay. And then, I guess, speaking more generally to Brandon’s question before, are those returns just in general becoming closer where [it’s been] bid outspread for what people are looking for in terms of seller cap rates.
Are we getting closer in terms of that bid outspread?
Bob Sulentic
I think we’re getting closer. I think that as we’ve said on the last call during the fourth quarter, our current expectation is that during 2009, you will see the capital markets for commercial real estate bottom, and you will see an increasing velocity of transactions in the investment property space this year.
I don’t think there will be anything to write home about. I certainly wasn’t in the first quarter.
I don’t think it will be in the second quarter or perhaps not the third. But I would be surprised if by the end of this year, we didn’t see a pick up in that business.
So that’s our expectation at the moment. That’s based on a significant narrowing of the bid outspread.
I would say as we’ve mentioned before that in the U.K., we actually think we’re quite close to that point. There are real indications in that business and the valuations there of course are much more transparent than they are out here.
But we have lot of indications in the U.K. and more broadly in Europe.
We’re getting pretty close to that point. I think in the U.S., there’s not a lot of debate anymore about where valuations are.
I would say though that at where valuations are you don’t have really sellers unless they are forced sellers. These valuations are down significantly.
And I think a lot of owners if they are able to hold certainly believe it is in their best interest to do so, so that will constrain velocity somewhat.
Operator
And thank you. Our next question comes from the line of [Vikram Malhotra] with Morgan Stanley.
Please go ahead.
Vikram Malhotra - Morgan Stanley
Hi. Thanks.
It’s actually Vikram in for Vance. I just had a couple of quick questions.
First is on the leasing side, you talked a bit about changes in the commission rates and actually seeing an increase in the fees that you can actually get to even though it’s a downturn. Can you talk a little bit about that the lease terms, specially in renewals, clients looking to shorten that.
Is it regional, [they have got] any trend you’re seeing there?
Brett White
Sure. Well, looking at leasing revenues, what you’ll find is that the decline we talked about in leasing revenues, which were about 30% globally, plus or minus couple 100 basis points in any one geography, that is split not evenly but fairly evenly between velocity and value on the revenue, a little bit 50 and 80% down on velocity, [like amount of] value.
And so what you’re seeing then is what we’ve always talked about occurs in the down cycle in leasing, which is, first, the tenant, if they are able, want to shorten the terms of their leases, they want to commit to the least amount of space possible, there are very conservative. It’s ironic, of course, because in a down cycle probably the prudent thing to do is to extend your lease as long as you can, or write a new lease as long as you can, and take advantage of the down rents, the strategy that we use with our tenant clients.
And what you do see occur in the marketplace now is lot of tenants going back to owners well-ahead of the expiration of lease and offering more term for a less space rent. It’s called blend and extended, it’s a little silly term.
But that’s what people do. So they’ve got four years left on their lease, they are Midtown Manhattan, 100,000 square feet.
They are probably going back down right now and saying, listen, while we write this lease for 10 years, 15 years, but the face rate I’m paying now, it’s $68 a foot, I’ll offer you 45 or offer you 50. Those types of conversations are very prevalent in the marketplace right now.
And I’d say that is the trend that you would expect to see in this market. That provides by the way some descent velocity to leasing business where there might be that velocity when you think about it at first blush that is supportive to the business.
Vikram Malhotra - Morgan Stanley
I imagine typically in Asia and in parts of Europe, the lease terms, it could be a little shorter. Are you seeing that occurring there as well?
Brett White
Well, in Europe, it depends on the market. For example, U.K.
lease terms can be very long terms. So I would just rather than go market-by-market, [typically], it will take hours, I think, generally speaking, you can count on what I told you, which is lease rates are coming down, that’s a negative on the revenues.
Term to a lot of tenants, if their leases are coming up right now, they’ve signed a 10-year lease, they maybe sign a shorter-term lease. Other tenants, I think, more forward-looking, longer-term thinking tenants are actually doing the opposite.
They are going in early and they are trying to extent leases and take advantage of lower term right now. All that together brings the type of decline in leasing revenues that you saw on the quarter, about 30%.
And I think what you’re going to see for the balance this year is rents are going to continue to be pressured. We think vacancy rates in the U.S.
office space may peak as high as close to 20% by early to mid next year. And so, there are ways to go on the leasing side.
There isn’t any great news out there at the moment. But you do all this countervailing dynamics there depending on which kind of tenant is in the marketplace, and what their viewpoint on their own business is.
Vikram Malhotra - Morgan Stanley
Okay. Thanks.
And then, just on the Outsourcing segment of your business. I imagine that you said more clients wanting to outsource, even new clients coming in.
I imagine there are more people also in terms of the providers trying to get a piece of that business. Two sides; one, when companies turn to you, I mean, apart from price, what are they really looking at?
And then, when they say, okay, they choose someone else, what are the main factors for them doing that?
Bob Sulentic
Sure. Let me [dissect] that business first.
When it comes to large global outsourcing business, I believe there are really only two providers out there that are viewed as seriously competitive in that business. So, very large Fortune 500 Corporation is going to outsource globally, it really in most cases, it comes down to two providers, it’s ourselves and Jones Lang LaSalle.
Great competitor of ours, they do a terrific job in that space, and our two firms, I think, compete head to head daily, virtually every large outsourcing contract. Why does one win over the other?
It’s selling. We all bring to the table competencies that they can well serve to those clients, relationships play a role playable, the competency and depth of the team that actually is going to work on that account certainly plays a role.
There are a lot of factors that come into why one firm wins over another firm. But I would say between those two top firms, we’re both out there fighting hard.
I think if you could actually add the numbers up, I think that the numbers show that we certainly are the dominant firm in that business and have a materially larger share of the overall global outsourcing business than any other firm. But in today’s marketplace, those two firms are competing very well head to head.
Behind them, those two firms, you have a lot of outsourcing work that goes out on a more regional basis or in a single business line basis. So you may have a client that goes out and says, we’re just going to outsource transaction management.
When that happens, you now introduce dozens of competitors that can play in that space. If they’re just going to outsource facilities management, you have players like Johnson Controls or others that can play in that space.
And then you get into other reasons why one firm wins over another. I think, as we think about outsourcing, as our investors and analysts think about outsourcing, the things to think about and they are important to remember are these; first, the trend to outsource the basic service around commercial real estate, owned or occupied by corporation, is going to increase over time.
That is the fundamental dynamic in the business that is not going to change. Second, the ante to play in that game has been raised materially every year the last 10 years.
And what that’s done? It has squeezed out almost every competitor from being able to compete in the highest level of the outsourcing games, which leaves us with really just a couple or maybe three firms that can do that work on a global basis.
That trend, the upping of the ante, the amount of technology and resource and people we have to assign these accounts will continue to make this game a really a two firm, perhaps a three firm game. It is just not possible for regional firm or a firm that’s not well-capitalized to compete for a global outsourcing contract.
It’s just not possible. So, these are very supportive, very positive dynamics behind our business.
And it’s the reason why you’re seeing this downturn, how important outsourcing has become for CB Richard Ellis. And it will continue to be important.
Vikram Malhotra - Morgan Stanley
Okay. Thanks.
And just last question for Bob. There were quite a few adjustments, I just wanted to make sure, was there any NOL this quarter, and is that going to impact the tax rate going forward?
Bob Sulentic
There was one discrete item that impacted our tax rate this quarter that actually made the tax rate a bit nonsensical for the quarter. But beyond that, we don’t expect anything.
Operator
And our next question is from the line of Brandon Dobell with William Blair. Please go ahead.
Brandon Dobell - William Blair
I wanted to follow-up on the previous commentary. I guess, just trying to get a sense of your level of confidence now versus -- it does seem like that your tone, Brett, is a little bit different than we heard maybe a three months ago or six months.
Is it just because you kind of made it through the debt stuff and you made it through Q1 without having a major issue? Or do you see signs out there that you feel like you are a lot closer to a bottom than you were three months ago?
Brett White
This is the question as to why have I been so negative the last three years and why am I little more positive now, I love it. So the last two year’s, we’re about to hit worst down cycle in history.
I’ve nothing to criticize to be negative, right? Because I tell you that look, we’re not going to mince words with you guys.
We saw this downturn coming. We knew it’s going to be ugly, and it was train wreck.
And thank goodness, we took that view. Because we got [that cost] a while ago and it has been a really magnificent effort by our people to get cost out of business.
So, if I sound a bit more positive today, I would say it’s based on these things; first, this amendment that we got was something quite unusual. I know it’s a long document, I’ve had few people tell, it’s put them to sleep at page 50, and it’s a 112 page document.
It’s a pretty incredible thing, and it showed us two things; one, it showed the great support and confidence that our long-term lenders have in this company. They gave us optionality and gave us permission to do things to control our own destiny, I think, are very unusual in credit agreement amendments.
And it’s a huge boost in confidence to us and a gesture of confidence from them to us. Second, in that amendment, I think, it demonstrated that it’s a competency we have here in the firm.
We’re creative, we’re aggressive, we have a terrific Treasurer in Debbie Fan. We have a terrific individual in Jim Groch, our Chief Investment Officer, who spent a lot of time working with our own team internally and then with our primary lenders to come up with an amendment that will serve us well down the road.
So we feel very, very good about that. Second, and I’ll be frank with you, the amount of cost that our managers and employees have been able to take out this business is well beyond a number I thought was achievable.
And this company, as you know, we’re highly focused on margins, so maybe we take an inordinate amount of pride in that. I’m not sure we want to be known as a company that cuts cost, well, but frankly, we are.
To talk about a number, a $500 million as a cost target, you know if we throw it out there, we damn well intend to beat it, is a pretty incredible thing. And that amount of cost reduction gives me a greatest confidence that the optionality for us in our own hands.
And we have the ability here now to control our destiny and deal with this very, very difficult marketplace. I would add to that the point you made which is I don’t know -- look, we’re certainly not at bottom in leasing yet.
And the leasing market is under a lot of stress and it’s going to be stressful for a while. The capital markets, I think, we’re getting there.
I believe we’re bouncing along the bottom. I don’t think it’s going to get hugely worse, almost impossible to imagine that it could.
And I do think there’s a reasonable opportunity for it to improve in 2009. I hope I’m not wrong on that.
So all that combined, a terrific amendment, really Herculean efforts on cost cutting far outsize than anything else we’ve seen in the industry. Very high morale inside the company, people here, I think, feel that we are absolutely on the right path, doing the right things, grabbing share, cutting cost, a good relationship with our lenders.
Those things together give me a sense of confidence that you’re right, probably, it wasn’t as strong two quarters ago.
Brandon Dobell - William Blair
Okay. And then, one final one for you.
Kind of from a management philosophy perspective, you talked about rapid pace of earnings growth as the market recovers. How should we think about how quickly you start to replace some of the costs you cut out?
Or maybe some that take a year to before you are comfortable putting them backend. Some that are immediately put back, maybe it’s broker splits.
How do we think about your philosophy addressing some of the (inaudible), lean organization right now as things start to get better for you?
Brett White
Well, I’d like to say there is a science around, but there isn’t. Here’s how I think it plays out.
In our industry, and I expect it’s probably the same in most industries, certainly most service industries, when you take this amount of cost out, there are some impacts from that. One is, the effort to take out is enormous.
And I think that at the management level, right down to the office level, it makes people think twice about onboarding people and onboarding expense when the market begins to improve. They remember what it was like to go in the conference room and sit down with an employee who has been with them for 20 years, that’s got kids in school, and a family to feed, and let him go.
That is no fun. And it’s something that we loathe doing.
And the impact of that is that people tend to remember that for a while. And yet, as sure as I’m sitting here today, I can tell you eight years from now, seven years from now, even as tight as we are on the expense base.
Those are expenses again, because you’ll have written a very, very strong return to the marketplace. We’ll rationalize investments that probably shouldn’t meet the test.
We’ll probably bring on a few more people than we need to bring on and we’ll need another event to pare down the organization again. And I’ve talked about this before.
I was a biology major in college, and I think organically about business. We’ve always said that the best thing for a services business are events of some sort every few years whether it’s a market downturn, whether it’s a capital markets events, whether it’s large acquisition, these firms certainly as big as our firm is tend to grow the expense line regardless.
And these events, whether it’s the acquisition of Crow Company, the acquisition of Insignia, the [MBO, the IPO] or a down market, these allow us to get back at the cost structure in a fundamental way. This attack in the cost structure was unprecedented.
I believe that the expenses in the up market will be onboarded slowly. And I believe that you’ll find that the managers here and the employees here are going to very much enjoy it’s strong return to profitability.
Remember, they’re paid off that. So folks who haven’t been paid much lately and they know that their incentive bonuses will be bigger if they can keep the cost out of the business and grow the revenue line than if they don’t.
And I think you’ll see that will certainly be the case for some years.
Operator
Speakers no additional questions in the queue please continue.
Brett White
Great. We appreciate everyone’s time on the call today, and we look forward to talking to you again at the end of the second quarter.
Thanks.
Operator
And ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation.
You may now disconnect.