Apr 29, 2010
Executives
Nick Kormeluk – IR Brett White – CEO Gil Borok – CFO
Analysts
Anthony Paolone – JPMorgan Chase & Co. Kevin Doherty -– Banc of America Securities/Merrill Lynch Sloan Bohlen – Goldman Sachs & Co.
Will Marks – JMP Securities
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the CB Richard Ellis First Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode and later, we will conduct a question and answer session with the instructions being given at that time.
(Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr.
Nick Kormeluk. Please go ahead, sir.
Nick Kormeluk
Welcome to CB Richard Ellis's first quarter 2010 earnings conference call. Last night, we issued a press release announcing our financial results.
This press release is available on the homepage of our website at www.cbre.com. This conference call is being webcast live, and is available on the Investor Relations section of our website.
Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archived audio of the webcast, a transcript and a PDF version of the slide presentation will be posted to 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 future growth momentum, operations and 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 and particular any discussion of risk factors or forward-looking statements, which are filed with the SEC and available on 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 within the appendix. Please turn to slide three.
Our management team members participating with me today are Brett White, our Chief Executive Officer and Gil Borok our Chief Financial Officer. Also with us today for the question and answer session is Jim Groch, our Chief Investment Officer.
I will now hand the call off to Brett.
Brett White
Thanks, Nick and please turn to slide 4. I want to begin our call today with some comments about our financial performance in the first quarter.
I am very pleased to report that we achieved a meaningful increase in total company revenue and EBITDA over last year, and well ahead of our internal forecast. The performance improvement was visible across all regions we served, and most notably, in our largest lines of business sales, leasing and outsourcing.
As compared to the first quarter of 2009, investment sales revenue grew over 15%, leasing performance rose over 20%, outsourcing achieved 6% revenue growth driven by our EMEA and Asia-Pacific regions. Appraisal and valuation, our fourth largest service line this quarter also achieved double-digit revenue growth versus Q1 in 2009.
This 15% growth in aggregate revenue combined with continued vigilance around expenses pushed our normalized EBITDA to $87.5 million in Q1 2010, 62% higher than a year ago while our normalized EBITDA margin came in at 8.5% versus 6.1% in Q1 2009. This performance is indicative of the fact that we have entered the early stages of a commercial real estate recovery.
We continue to improve our balance sheet during the first quarter. We repaid nearly $56 million of debt and extended the maturity on approximately $272 million debt through the additional loans exchanges.
These actions and others completed over the past year and a half has put our firm in a position of significant strength as we move to more offensive [pastures]. Please turn to slide 5.
Our position in the industry has never been stronger. As shown on the slide, as it relates to US investment sales, you will notice how much a distance there is between us and our competition.
In addition, in 2009 we also took over the number one position in US non-bank loan origination. Similarly on slide 6, you will see that our 2009 global sales and lease transaction values were 83% higher than the next competitor.
We have the clear leadership position in many of the world’s most important business centers. For example, we were responsible for 28 of the 50 largest leasing deals in Manhattan in 2009 according to [Cairns], New York.
Our nearest competitor had 15. Earlier this week, the first quarter 2010 lead tables for London were published; CBRE had the highest market share for both leasing and investment sales.
This market dominance, of course, cuts both ways. In a rapidly declining transaction environment, such as we experienced in 2008 and 2009, we must be more vigilant on costs than some other competitors to maintain our industry-leading margins.
I am proud to report that we have succeeded in that goal. However, now that we are clearly entering the early days of recovery cycle, our disproportionate market share should drive disproportionate rev in company profits.
Our notable quarterly transactions are listed here on slide 7. I will not spend time going through them, but we include them to illustrate key business wins.
And with that, I will now turn the call over to Gill to go over our financial results. Gil?
Gil Borok
Thank you, Brett. Please advance to slide 8.
Revenue was $1 billion for the first quarter of 2010, up 15.2% from last year primarily as a result of improvements in sales, leasing and outsourcing activities. Normalized EBITDA was up over 60% to $87.5 million in the first quarter of 2010, providing a normalized EBITDA margin of 8.5%.
Our cost of services was down 220 basis points as a percentage of revenue to 60% in the first quarter of 2010 versus 62.2% in the first quarter last year, versus also from the improvement in overall revenue, a higher mix of transaction revenue versus the prior year quarter along with the benefit of cost reductions. In the first quarter of 2010, operating expenses as a percent of total revenue declined by a 140 basis points to 33% versus 34.4% in the first quarter of 2009.
In absolute terms, operating expenses increased 10.6% in the first quarter of 2010, much less than the 15.2% increase in total revenue during the quarter. Excluding normalized items in both years, in the first quarter of 2009, operating expenses benefited significantly from lower net bonus and carried interest compensational accruals, recoveries of fees receivables accorded lease reserves for vacated facilities, and reduced legal and bad debt provisions.
This was primarily evident in our Americas and the EMEA segments, and did not recur in the first quarter of 2010. Interest expense for the first quarter of 2010 was approximately $15 million greater than the first quarter of 2009.
This was primarily due to the 11.625% bonds issued in June 2009 as well as higher average interest on our term debt as a result of the March 24, 2009 credit agreement amendment. In the first quarter of 2010, earnings per share was affected by a high tax rate resulting from a greater impact in the current period of losses sustained in jurisdictions where no tax benefit could be provided.
The impact of such losses will lessen as the year progresses such that the company’s full year’s tax rate should approximate 38%. First quarter 2010 earnings per share was also impacted by approximately 50 millions more shares outstanding, many a result of our June and November 2009 equity offerings.
Please turn to slide 9. Revenue from property and facilities management, fees for asset under management, loan servicing fees and leasing commissions from existing clients are all largely recurring.
This revenue represented approximately 61% of total revenue for the first quarter of 2010 versus 65% of total revenue in the first quarter of 2009. Parking and facilities management which was our largest service line in the first quarter 2010 increased 6% versus a year ago and accounted for 41% of total revenue in the current quarter as compared to 44% in the first quarter of 2009.
Leasing increased 23% in the quarter versus the first quarter of 2009. Sales revenue increased by 51% in the first quarter 2010 versus a year ago providing a strong signal that global investment sales activity is recovering.
Appraisal and valuation revenue grew 12% in the first quarter 2010 as compared to the first quarter 2009.This is driven by an increase in our lender and special services business resulting from more workouts, restructurings or closures in bankruptcies. Global investment management revenue was down 12% year-over-year, development and services revenue was down 16%, and the commercial mortgage brokerage business was relatively flat with slightly higher servicing fees being offset by slightly lower origination fees.
Please turn to slide 10. The outsourcing business grew 6% in the first quarter of 2010.
During the first quarter, we won 8 new accounts, we expanded five client relationships and we signed several news. Our square footage under management increased 5% to a total of 2.3 billions square feet at the end of 2010 versus 2.2 billion square feet at the end of 2009.
Although I won’t run through all the details, we have attached slide 11 which provides certain US transaction market statistics illustrating just how challenging vacancy and absorption trends have been and are projected to be in 2010. That said, the estimated range of Cap rate for 2010 shows some possibility of contracting.
We have continued to see some Cap rate contraption among high-profile properties in large markets. Please turn to slide 12.
Investment sales activity continue to revive from the depressed levels of 2009. For the market as a whole, aggregate first quarter 2010 volume increased 49% from the first quarter of 2009 when market activity hit trough levels according to Real Capital Analytics or RCA.
Compared with the fourth quarter of 2009, RCA reports that first quarter volume declined only 14% to $15.2 billion, which is encouraging given that Q1 is historically the weakest quarter and Q4 the strongest quarter for investment and sales. CBRE continued to perform well in an evolving market once again achieving the number one position in US investment sales in the first quarter according to RCA’s preliminary broker rankings.
Our own America sales revenue for the first quarter increased 51% on a year-over-year basis. Our Americas leasing revenue increased by 20% in the first quarter of 2010 as compared to the prior year reversing the trend from 2009.
We achieved this revenue increase despite US office vacancy rates, which increased by 30 basis points in the first quarter 2010 to 16.6% from 16.3% at the end of 2009, and generally lower rental rates. Due to this continuing trend in vacancy and rental rates, and the fact that a portion of our leasing revenue is dependent on employment growth, which is sluggish, we believe performance may be choppy through the rest of 2010.
Please turn to slide 13. Our investment sales revenue in EMEA increased 16% in the first quarter of 2010 as compared to Q1 2009.
This is a nice recovery from the 41% decline for the full year of 2009. CBRE’s revenue from leasing and EMEA grew 25% in the first quarter of 2010 versus Q1 2009.
This growth was led by both London and Paris. Please turn to slide 14.
CBRE’s sales revenue in Asia Pacific jumped by a 123% in the first quarter of 2010 versus the prior year’s first quarter. This improvement was led by the return of some larger transactions in Australia and New Zealand.
The company’s leasing revenue in Asia Pacific grew by 33% in the first quarter versus the prior year first quarter which was much improved over the full year 2009 contraction of 12%. Rental rates across China showed signs of improvement while other markets showed continued signs of stabilizing.
The exception was Tokyo where land rules became more accommodating and reduced rental rates to attract and retain tenants. Please turn to slide 15.
Revenue for the development and services segment was down 12% to $18.3 million in the first quarter of 2010 versus the first quarter of 2009. Operating results for the first quarter of 2010 showed normalized EBITDA of $5.6 million and improvement over prior year that was driven by continued cost containment.
The first quarter of 2010 normalized EBITDA margin was 30.6% as compared to 14.8% for the first quarter of 2009. At March 31st 2010, in process development totaled $4.7 billion down 13% from year-ago levels.
The pipeline at March 31st 2010 totaled $900 million down 40% from year-ago levels. The combined total of $5.6 billion is down 19% form year-ago levels.
At the end of the first quarter our equity co-investments in the development services business totaled $65.4 million. Please turn to slide 16.
Global investment management revenue was up 6% to $39.4 million in the first quarter of 2010 from $37.3 million in the first quarter of 2009. This was driven by rental revenue associated with the consolidation of several properties due to a change in accounting regulations effective January 1, 2010.
Fees for assets under management decreased by $3.4 million due to downward pressure on certain asset management fee structures and a decline in assets under management. Assets under management totaled $33.3 billion at the end of the first quarter of 2010 which was down 4% compared to the fourth quarter of 2009.
And down 8% versus the first quarter of 2009 mainly due to lower property valuations and currency declines. Notwithstanding the above, during the first quarter we made $900 million of acquisitions and portfolio takeovers and $500 million of dispositions globally.
Our co-investments in this business at the end of the quarter totaled $93.5 million. Our global investment management EBITDA reconciliation detail is shown on slide 17.
First quarter 2010 EBITDA was impacted by net non-cash write-down of $4.5 million mainly attributable to decreased property valuations, and $400,000 of cost containment expenses. In both the first quarter 2010 and the first quarter of 2009 we didn’t realize any carried interest revenue.
We accrued a net $1.1 million of carried interest compensation expense as compared to the first quarter of 2009 when we reversed a net $3.1 million of carried interest compensation expense approvals. As of March 31st 2010 the company maintains a cumulative approval of carried interest compensation expense of approximately $15 million, which pertains to anticipated future carried interest revenue.
In addition EBITDA was negatively impacted by bad debt provisions associated with asset management fees due from our fund. These items were partially offset by a benefit of approximately $5 million associated with the previously mentioned accounted change.
It should be noted that those accounting change had no bottom-line impact, the business operated at a modest pro forma normalized EBITDA margin of 3% for the first quarter of 2010. Please turn to slide 18.
Real Capital Analytics now classifies a $160 billion of commercial real estate as distressed. This includes properties that are troubled, including those that are delinquent or in default in lender RAO or in workout.
However more mortgages are starting to move in to re-structured flash/modified and resolved categories. The company’s portfolio of distressed assets being marketed for sale in the U.S.
now exceeds $6 billion. In addition we have been appointed with (inaudible) with $21.5 million square feet of property in the U.S.
Please turn to slide 19. During the first quarter we extended maturities on a net total of approximately $272 million of our term debt and revolver.
At March 31st 2010 we have approximately $165 million of term debt amortizing or maturing through 2012. Please turn to slide20.
Excluding our non-recourse real estate loans and mortgage brokerage warehouse facility, our total net debt at end of the first quarter 2010 was $1.4 billion similar to the end of 2009. During the first quarter we reduced cost gross debt by approximately $56 million and paid the majority of our bonuses.
At March 31st 2010 our weighted average interest rate was 7.1% similar to the end of 2009. Our leverage ratio or net debt to EBITDA as the (inaudible) agreements at the end of the first quarter was 2.06 times well under the maximum ratio permitted of 4.25 times.
Our trailing 12 month interest coverage ratio or EBITDA to interest expense as defined was 4.36 times well in excess of the required minimum of two times. I will now turn the call back over to Brett.
Brett White
Thanks Gill. And please turn to slide 21.
Although circumstances can always change it certainly feels like a broader economy has stabilized. Employment is showing early signs of improvement and corporate earnings are getting stronger.
And in many cases driven by revenue gains. Credit markets continue to slowly improve and property values have stabilized, even showing some signs of improvement for higher quality assets.
Buyers are increasingly beginning to move forward with purchase decisions, sellers are feeling more confident about listing properties. And occupiers are getting more comfortable making longer term lease commitments.
We would expect all these external factors to drive increased transaction volumes and revenue growth for our company. Our strong revenue results for the first quarter give us additional confidence so we are now in the early days of recovery in growth cycle.
Although this recovery may include some bumps along the way. As we continue to keep a watchful eye on expenses as evidenced by our margins, we are now transitioning to our more traditional aggressive and offense oriented posture.
Our firm is re-energized and highly focused on growth. Although market sentiment has greatly improved and business prospects are brightened.
Global economic growth and credit market still face meaningful challenges. Despite recent value stabilization were certain property classes many properties have current values that are substantially lower, but when they were originally underwritten by the owner and their lenders.
These properties face a possible funding shortfall as mortgages mature due to more stringent financial terms, lenders require today. We believe that more financial institutions may opt to take control of non-performing properties and we can expect to see more of these assets being brought to market for sale.
These factors continue to have the potential to create a disrupted environment during the commercial real estate recovery. As we look forward to remainder of 2010, we expect that investment sales will continue to show strong year-over-year growth.
Leasing should grow but it’s tied to (inaudible) recovery which may be a bit choppy. The outsourcing business will grow modestly showing improvements over 2009 quarterly results and revenue from asset based businesses will not experience significant growth for the coming year.
Our results for the first quarter were meaningfully better than our internal estimates developed late last year. The increase in velocity and size (inaudible) these transactions globally.
It showed unexpected strengthen their ability and I must say it is nice to finally be surprised by positive results rather than negative ones. The early results for April indicate a continuation of this trend and all these data points together allow us to maintain our view, that 2010 may very well mark to return traditional levels of growth for CB Richard Ellis.
Operator we will now take question.
Operator
Thank you. (Operator Instructions) Our first question will come from the line of Anthony Paolone at JPMorgan.
Please go ahead.
Anthony Paolone – JPMorgan Chase & Co.
Thanks good morning. Gil you’d mentioned some of the accruals items that impacted the quarter, but can you step back may be bigger picture and talk about why gross margins over the course of the year which changed so much because looking back over the last several years there were some years where there was a big pick up over the course of the year and some years were there wasn’t.
Given I would assume that brokers rates are pretty constant, just wondering why that changes.
Gil Borok
Sure. Good morning.
I think that lot it well most of it has to do a business mix and so you can’t have big shifts year-over-year and quarter-over-quarter from outsourcing revenues to transaction revenues and that will be the main driver. So outsourcing depending how far back you are going obviously pre Trammell Crow it was not nearly as bigger a total of as bigger portion of the total but post Trammell Crow you know its grown and in the down years of ‘08 and ‘09 it was a bigger portion of the total mix hence the cost of services portion although our P&L went up and we saw that reverse slightly in the first quarter as transaction revenues came back.
Anthony Paolone – JPMorgan Chase & Co.
Okay so if I look it for instance last year I think there was over 600 basis points of gross margin expansion from the first quarter to the fourth quarter. Given what you did in the first quarter of 2010 and what you are saying could it be that dramatic this year or do you think it will go flatter.
Gil Borok
The way I would answer that is traditionally you will see the seasonality come to from Q1 through Q4 so you’ll always see growth in or expansion in that margin over the course of the year. But as to whether it will be the same as last year more or less I can’t say at this point.
Brett White
Anthony this is Brett. That really turns most on the performance in Europe.
Europe traditionally is a zero profit or loss making business to at least the first quarter or sometimes even second quarter and even early third quarter, it’s the way the compensation programs work. Conversely when you get to the fourth quarter or late third quarter Europe’s margin become very, very high and that impacts your gross margin if you have flow to the P&L its all about that.
Anthony Paolone – JPMorgan Chase & Co.
Okay. And then second item, last quarter you had put a paragraph in the press release about just how you think the business could perform in a more normalized environment and I think we are all able to kind of back in to some numbers using that.
And now it sounds like the business is beating you in your internal projections. I know you are not giving guidance but is that paragraph and the parameters you outlined last quarter at least still valid and may be things are little bit better than that perhaps.
Brett White
I think as the accurate way to look at it, its certainly still valid and if we had buyers it would be, we have a better chance of achieving those financial objectives and perhaps we thought we had at the beginning of the year, I want to keep in mind and I think certainly you know this as well. There is a reason that FED didn’t raise rates yesterday.
And I think that uncertainty which is starting to cross to global geographies and economies right now is certainly something working on for others as well. In addition first quarter, its interesting and its great to have a strong first quarter but it really is relatively small numbers and these relative percentage beats the EBITDA and revenue are of a small base, it gets a lot more meaningful as we move in to the second and third quarter and certainly if we have beat to this or in the later quarters I think we can have a much deeper conversation about our full year view at the moment I would just say that it definitely supports that paragraph referencing from the fourth quarter release and probably gives us a positive buyer.
Anthony Paolone – JPMorgan Chase & Co.
Okay. And then just last item on (inaudible) I think you mentioned may be I missed this, the real estate pick up in 1Q on your balance sheet was that a change in accounting?
Brett White
Yeah and I didn’t actually comment on the balance sheet but you are exactly right that planning change has caused a gross up on the balance sheet both on the asset side and the liability side in those real estate lines.
Anthony Paolone – JPMorgan Chase & Co.
Are those assets can you may be put a little color around just how much you actually know or own versus just having to consolidate it, just any income those withdrawing offers that are development related.
Brett White
They are actually not development related they were in the investment management segment, it’s a handful of assets that we are now deemed to have control over. There is no ownership in those assets.
And there is no bottom-line impact it has an impact on EBITDA but all of it reverses out in the line item on controlling interests, so at the pre-tax line there is no impact on them.
Anthony Paolone – JPMorgan Chase & Co.
Okay. Thanks.
Brett White
Sure.
Operator
Thank you. And next we will go to the line of Kevin Doherty at Banc of America.
Please go ahead.
Kevin Doherty – Banc of America Securities/Merrill Lynch
Great thank you. I guess the follow up on some of the questions around just sort of the margin outlook, how are you thinking about the returns of the business as conditions improve form here.
And really I am trying to get at, do you think that type of incremental margin that we saw on the quarter something that gives the sustainable going forward or do you see more pressures of some cost kind of creep back in the business?
Brett White
Well it’s a good question and its very difficult at this point in year to predict what incremental margins will be and how much margin pickup will have for the year certainly if we have continuing quarters like the first quarter you are going to see very nice pickups in margin through the year. Incremental margin, it all depends on how much revenue we are on boarding, and where it’s coming from.
And in the first as Gil mentioned to Anthony we had very strong pick up in our transaction businesses and those come in off at good margins. And it feels, it feels to us that those businesses are performing quite well and we like the way they look at the moment I mentioned on the call that April is continuation of that trend.
So this is a year where margins could see some nice attrition. But again its early days and its really hard to tell at this point what the summer fall and fourth quarter will bring us.
Kevin Doherty – Banc of America Securities/Merrill Lynch
Okay. And then I wanted to see if you could just comment on any potential fall out from kind of the European tech prices unfolding there, what’s your exposure may be some of those countries that have been most hit.
And are you really hearing anything from your combined say conditions are changing at all… clearly running Paris continue to perform well but just thinking about some of those smaller markets.
Brett White
Right we really have no meaningful operations in Greece, we are doing a affiliate Portugal is a good but very small business for us, Spain is a very good business for us and very nice one we’ve had for many, many years. At the moment no impact whatsoever on the business I think for us like for most Google firms operating in continental Europe the question really is this kind of (inaudible) and moved through out the European union and create better problems and the larger jurisdiction Germany, UK, France we don’t think it will however if we are wrong and you see big downturns and continental Europe large in the large countries we would feel that.
But at the moment really no impact whatsoever on the business, all though we are all watching it with interest.
Kevin Doherty – Banc of America Securities/Merrill Lynch
Okay that’s fair. And then just a last question could you talk may be about some progress you made on winding some of those distressed properties in [Munich] you got that $6 billion right now.
What sort of interest are you seeing on those properties and have you had much of a driver from that business today?
Brett White
It’s a bit, its funny we’ve been in that space now for really two years and its just now we are beginning to see these properties beginning to move to the system. The overall dynamic in the marketplace on the purchase and sale of properties is, you’ve got a lo of capital that is been raised, the last two and half years, specifically for the purchase of distressed properties and while that’s happened very few distressed properties have moved through this system and therefore yields have come down a bit.
Now property class and you’ve got this dilemma where I am (inaudible) folks would have like to buy, we like to buy it at very high yield, distressed kind of yields are going out of more, we are bit more traditional yields. And so there is an interesting dynamic out there in the marketplace right now.
That having been said we are moving properties to this system in a distressed category I think that’s a dynamic that we’ll continue to pickup through the year if one more buyers come up with sideline and make the decision that this is probably the low end of the market and better to get in now then wait another year and have prices move up some more. In a lot of markets around the world we would tell you the prices have stabilized.
They’ve likely to hit a bottom and either hang in around that number or beginning in some places like the UK to begin to move up quite smartly and I think that, that’s driving more buyers of the side lines who are saying okay this is probably that is what its going to get and a good time to get in to the marketplace. That is in fact in the sale of distressed properties.
Kevin Doherty – Banc of America Securities/Merrill Lynch
Okay and do you think that’s a portfolio that could be enough to move the need or if more than activity picks up during the course of the year?
Brett White
Sure it will because again is that old analogy that you can fall off the bed but you can’t fall off the floor and investment property fells globally on the floor. So its interesting when you look at the investment property’s sale numbers that all of the public firms were reporting there are at 50, there are at 60 there are at 40%.
Well that’s true but there are 40, 50, and 60% from really, a very, very small number. So the sale of the distressed properties are going to move that needle.
Because again it doesn’t take a lot of business to bring that very low number up 20, 30, and 40% and yeah they will make a difference and we’ll see that, I expect to the P&L.
Kevin Doherty – Banc of America Securities/Merrill Lynch
Okay. I appreciate thanks Brett.
Operator
Thanks next we will go to the line of Sloan Bohlen of Goldman Sachs. Please go ahead.
Sloan Bohlen – Goldman Sachs & Co.
Hi good morning. Thank you.
Brett just for your comments on kind of shifting on the offensive a little bit, can you talk about may be kind of priorities for use of cash this year. Particularly what you guys have done in extending out some of the maturities and payments of your loans?
Brett White
Sure. Well certainly we have very discrete areas, we can push cash to use, we have our pro-investment and CapEx programs, we have debt repayment.
We have M&A we have co-investments and those are the primary areas that we focus on for cash usage, this year we talked about our CapEx expectations in the $50 to $60 range co-investment we would like to get some money out there on the co-investment side and are certainly working hard to do that. But even with a good year in the asset based businesses that amount of money we can get out and co-investment isn’t huge, it’s probably not the same range or $50 to $60 million.
That then leaves us with very few places to put that cash to use, there is M&A there is debt repayment. And I would say at the moment we are going through a lot of analysis in those two areas.
This is, it is art to be a very good time to be in the M&A space and it is, that having been said there are very few firms that are going to put themselves up for sale at the type valuations that are out there at the moment, our industry buys these businesses typically on a trailing three year average there and trailing four year average EBITDA. We don’t buy in perspective EBITDA so businesses that are going to make themselves available these year are probably not the best businesses out there.
But we are very interested in the M&A space, we spend a lot of time over there right now. And we are very interesting in taking a deliver.
And I would say those are the areas you would expect to see us put this cash in to use.
Sloan Bohlen – Goldman Sachs & Co.
Okay. Outside the pricing now do you have a sense for sizing of M&A deals that you potentially look to do?
Brett White
Sure if you know Sloan for our business model the bigger the better. And the most accretive deals we’ve ever done are the mega deals, the deal are currently at the most risk are the little deals were five or six or seven key people if they don’t integrate well walk out of the door and you have no value in what you purchase.
So we in our M&A screen we look at all size of transactions we are keenly interested in the larger firms. But that’s a very, very tough proposition.
It’s a multi-year process to identify court and ultimately bring one of those firms to the market or to the fold. If I had a choice that’s where we spend all of our M&A dollars but we don’t have that choice and because we don’t we have to be opportunistic.
And we are opportunistic based on what comes to the market and at the moment which come as a market are generally very small businesses that have made the decisions, that its going to be very difficult for them to survive or compete, come up, coming out of this down cycle. And looking on board with larger platform and that’s what we are seeing most of the activity at the moment.
Sloan Bohlen – Goldman Sachs & Co.
Okay. That’s helpful.
And then just kind of on the other side of it as you look at the mix of your businesses. It looks like the operating expense in your development segments has dropped fairly materially in the last couple of quarters.
Can you talk about that business going forward and how you view that in particularly there isn’t much in the way of going on out there right now?
Brett White
Sure, well Sloan, all credit to our development business. There is no business in the firm that went after expense more aggressively than our Trammell Crow Company.
They attacked expense as a percent of their total OpEx. They reduced significantly more than any other business line or any geography.
They really carried that business down to a dial tone where they could get through the last few years remained EBITDA positive, and I congratulate them for that. And, they are now in a position where they can grow and they are excited about the opportunities that they believe that this marketplace will bring them.
Certainly in the asset acquisition and disposition business, this is where people start to get really interesting about creating value at this point in the cycle, and they are interested. That having been said, opportunities are very few and far between.
Most of their activity at the moment is in development of what I would call zero risk transactions. These are builder suites for customers or on-site development or educational institutions, hospitals these sorts of facilities.
We love that business. It’s basically cost plus business and it’s a good way to get the bills paid and create some value in a tough market, but now they are beginning, like the rest of the business, to get a more offensive and look at more investment opportunities out in the marketplace.
I think they will likely find some.
Sloan Bohlen
Okay. And then just one last question and this may be for Gil, I guess, but comparatively yesterday you basically said they were shifting some of the way they looked at cost structures and variable comps versus fixed in certain regions of the world, is that something you are seeing across the industry as something that you have looked at within?
Brett White
It’s Brett. I have to chuckle Sloan at your comment for over a decade that very worthy competitors of ours used our commission structure as a real point of differentiation and frankly used it to criticize our firm and make a point of differentiation between the two firms that there are sales force was salary bonus ours was commission.
We welcomed them to the commission business. The commission structure has always been the right structure for the transaction business.
We have been a commission structure firm from day one, Sloan. So there is no need for this firm to be thinking about or discussing changes in compensation structure for our sales force.
Sloan Bohlen
And do you think that does change the competitive dynamic at all?
Brett White
I think it does change the competitive dynamic. I think that a commission structured sales force requires a different type of management.
It’s something that’s learned over time and it’s something that is frankly harder, I believe, to do, than managing a purely salary bonused sales force. Competitively, it really now puts everybody on an even footing as it comes to compensation, it’s not difficult for any producer or for that matter any firm to quantify the compensation structures that the major competitors and Sloan, as I think you know all the manor competitors pay almost exactly the same commission split.
Competitively, Sloan, people in this business don’t move for split, they are smarter than that. They move for platform and the platform that we have a platform that very worthy competitor has a terrific platform, and as I said for many years I think they are going to find that the highest quality talent is going to end up generally at those two firms, and I think that’s a great outcome.
Sloan Bohlen
Okay. Great.
Thank you, guys.
Operator
(Operator Instructions) And next we will go to the line of Will Marks with JMP Securities. Please go ahead.
Will Marks – JMP Securities
Thank you. Good morning, Brett and Gil.
Just a follow-up actually to the last question about going to certain… changing comp structures in certain markets, maybe to what he was refereeing are there markets where the general comp structure is salary plus bonus, maybe a European market or Asia-Australia where you are looking to change the typical model could be that way?
Brett White
Yes Will, it’s a great question and I think one of the big mistakes that some of our competitors have made in the past have been to impose a compensation structure or regime into a market or geography that uses a different compensation structure, and by the way we love it when competitors do that because it displaces the best people and we saw that happen in Australia and the Asia-Pacific region five, six, seven years ago where… and much of that region is on what looks like a commission structure and, when some other firms went to try salary-bonus there lots of people found that to be untenable and we picked out literally hundreds… 300 in Australia over that period of time, and I think… my opinion is Will then building these types of transaction oriented services business, the ideal structure, if you can do it, is to have an appropriate and competitive compensation structure for every local market you participate in. If you can do that and if those structures provide you with margins that you believe are acceptable, then you have a really powerful value proposition to focus on all these markets, and not only to them, but we can tell our clients when they are being serviced by teams in those markets, those teams are very solid and very happy with their lots and their business life.
And we have been able to do. We have been residents in these markets for decades, in some cases for 40 and 50 years, and our compensation regimes and structures are different, market to market.
But all of them, the one common denominator about all them is they produce exceptional margins, and when you look at our margins we had market leading margins well here for years and that is a result of the fact about dynamics, that tension making sure our compensation systems are appropriate and competitive in the local market for the same time produce exceptional margins and that balance is hard to come by, but we have found it.
Will Marks – JMP Securities
Okay. Great and I appreciate that.
Okay. Moving on, a few specific modeling questions?
One, the notes table on real estate as by 200 million pretty significantly during the quarter, can you explain that?
Gil Borok
Yes Will, it’s Gil. Good morning.
The question was asked, it’s relating to the accounting change. So we had certain assets in investment management that under the new accounting rules came in to effect at the beginning of the year -- new consolidation accounting rules.
We have to consolidate certain assets we didn’t have to under the old rules. There is no change in ownership but rather change in how a control is defined and so we consolidated those.
It’s driving up the assets, the real estate assets and similarly driving up the liabilities. So that significantly was up.
Will Marks – JMP Securities
Sorry, but I know that’s competitive. I was confused earlier.
Okay. Second question is on the net debt was maintained in the first quarter which is pretty impressive given you are paying out bonus, unless you can quantify your bonuses and then actually tell me how you are able to maintain your net debt levels?
Brett White
Well we don’t generally disclose the bonus numbers that we pay out. So I can’t give you a specific number, but what I can do – I think you are exactly right, that with net debt being maintained we obviously had a good quarter relative to cash flow and being a first quarter because that number is a significant number for us and so we maintained and by definition we did well.
Will Marks – JMP Securities
And you did said that pretty much all of your bonuses have been paid now, right?
Brett White
Pretty much, the majority have been paid, yes.
Will Marks – JMP Securities
Okay. Let’s see for the mortgage brokerage it was up 1% during the quarter I typically modeled that consistent with investment sales and it seems to me you would be lagging or maybe something else was going on how -- it’s a small part of the business, but I am serious?
Gil Borok
Yes, Will it’s in principal your historical modeling, I think, was spot on and that was the right way to think about that business. We are in a unusual environment right now where some of the buyers they are out there are not using traditional financing to acquire these properties and many buyers are taking the financing that is on the property and assuming that financing in fact those are the most attractive properties that are out there right now are properties that are leveled appropriately and have assumable financing on them.
So the mortgage business had a fairly soft quarter. The housing investment property market stabilizes and we have seen a more traditional mix of buyers in the marketplace and we should expect that business to post more solid growth.
Will Marks – JMP Securities
Thanks. The -- one more question and I will move on.
The non-controlling interest item in the income statement which was 9.5 million, something like that, is that 9.6 million what’s -- how come you look at modeling that for the rest of the year, I know that’s tough question but any thoughts, last year was 61 million for the full year?
Brett White
Yes, when you are looking it on the income statement, Will, there is -- that’s a GAAP number which would include the minority portion of any write-downs that we take and now we do expect the write-downs that we -- you can see in the first quarter they were not a significant number and that’s what we expect going forward that we might have some as we mark-to-market in a timely fashion each quarter. So, we can expect as little bit more potentially, but it won’t be a meaningful number, but unfortunately what that does is a disturbing trend that you might see.
The only other color I think I can you on that line item is that most of that minority interest is associated with the development business where our minority is actually bigger than our stake and so as a result it will move with the business generally speaking and not withstanding the write-downs that we have been taking and which I will classify as one time. So it’s a sort of move with that business.
There is a little bit of investment management and not withstanding those write-downs it will move with those asset based businesses.
Will Marks – JMP Securities
Okay. Great.
Thanks a lot.
Operator
Thank you. And gentlemen, there are no further question in queue at this time.
Brett White
Great. Well thank you operator, and thanks folks for calling in.
We will talk to you at the end of the second quarter.
Operator
And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for your using AT&T Executive Teleconference.
You may now disconnect.