Jul 28, 2010
Executives
Nick Kormeluk -IR Brett White - CEO Gil Borok - CFO
Analysts
Anthony Paolone - JPMorgan Sloan Bohlen - Goldman Sachs & Co. Will Marks - JMP Securities David Ridley Lane - Bank of America Brandon Dobell - William Blair
Operator
Ladies and gentlemen, thank you for standing by and welcome to the CB Richard Ellis second quarter earnings conference call. At this time, all participants are in a listen-only mode.
Later we will conduct a question-and-answer session. Instructions will be given at that time.
(Operator Instructions) And as a remainder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Nick Kormeluk. Please go ahead.
Nick Kormeluk
Thank you and welcome to CB Richard Ellis's second quarter 2010 earnings conference call. Last night, we issued a press release announcing our financial results.
This release is available on our 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 there which you can use to follow along with our prepared remarks. An archive audio of the webcast, a transcript and a PDF version of the slide presentation will be posted on our 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, financial performance and in particular, our business outlook.
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 statement we make here today.
Please refer to our second quarter earnings report filed on Form 8-K last night and our current annual report on Form 10-K and current quarterly report on 10-Q in particular. Any discussion of risk factors or forward-looking statements which are filed with the SEC, are available at the SEC website, www.sec.gov for a full discussion of the risks and other factors that may impact 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 3. Our management team members participating with me today are Brett White, our Chief Executive Officer; and Gil Borok, our Chief Financial Officer.
I will now hand the call off to Brett.
Brett White
Thank you, Nick and good morning everyone. Please turn to slide 4.
I would like to begin the call with some comments about our financial performance in the second quarter. We were pleased to report excellent results for the quarter with revenue, EBITDA and earnings all growing significantly over Q2 2009.
All major service lines contributed to the strong results. As compared to the second quarter of 2009, investment sales revenue increased more than 60%.
Leasing revenue rose 29%, driven by longer term and larger square footage transactions. Outsourcing revenue grew 10% with strong activity in all geographies.
Development services sold two high quality assets for a significant gain this quarter. Our 23% revenue growth coupled with strong expense management delivered total normalized EBITDA of $165.2 million in the quarter, 82% higher than the second quarter of 2009.
This translated into a normalized EBIDTA margin at 14.1% in the second quarter of 2010 versus 9.5% in the second quarter of 2009. The commercial real estate recovery continued to progress in the second quarter.
The trajectory of this recovery however is difficult to determine as it is set against the backdrop of a muted and bumpy recovery of the broader economy, with wide geographic variability, from a very quick snap back in most of Asia Pacific to a moderate rebound in the US and to a rebound and stabilization in Europe. Our notable quarterly transactions are listed here on slide 5.
I will not spend time going through them. We have included them to illustrate some our key business wins in the quarter.
I'll now turn the call over to Gil to go over our financial results. Gil.
Gil Borok
Thank you, Brett. Please advance to slide 6.
Revenue was $1.2 billion for the second quarter of 2010, up 22.7% from last year, primarily as a result of improvement in sales, leasing and outsourcing activities. Reported EBIDTA more than doubled in the second quarter of 2010 to $161.6 million from $68.4 million in the second quarter of 2009.
Normalized EBIDTA was up 81.7% to 165.2 million in the quarter from $90.9 million in the second quarter of 2009, significantly lifting normalized EBIDTA margins to 14.1%. Our cost of services was down 140 basis points as a percentage of revenue to 57.9% in the second quarter of 2010 versus 59.3% in the second quarter last year.
This resulted from the strong improvement in overall revenues and a higher mix of transaction revenue versus the prior quarter along with the benefit of cost reductions. In the second quarter of 2010 operating expenses as a percent of total revenue declined by 270 basis points to 31.7% versus 34.4% in the second quarter of 2009.
In absolute terms, the year-over-year increase in operating expenses was driven by higher bonus compensation accruals as a result of stronger financial performance. Second quarter 2010 GAAP diluted earnings per share was $0.17 versus a loss of $0.02 last year.
Adjusted diluted earnings per share were $0.18 versus $0.04 in the second quarter of 2009. Second quarter 2010 earnings per share was impacted by approximately 50 million more diluted shares outstanding, many as a result during our November 2009 equity offerings.
Our second quarter 2010 tax rate was 36.5% and our full year 2010 tax rate should approximate 36% to 38%. Please turn to slide 7.
Revenue from property and facilities management, fees for assets under management, loan servicing fees and leasing commissions from existing clients are all largely recurring. This revenue represented approximately $0.60 of total revenue for their second quarter of 2010.
Property and facilities management, which remained our largest service line in the second quarter increased 10% versus a year go. It accounted for 37% of total revenue in the current quarter as compared to 42% in the second quarter of 2009.
Leasings increased 29% in the quarter versus the second quarter of 2009. Sales revenue increased by 61% in the second quarter of 2010 versus a year ago providing confirmation that global investment sales markets are recovering.
Appraisal and valuation revenue grew 10% in the second quarter of 2010 as compared to second quarter of 2009. This was driven by an increase in our lender and special services business due to more workouts, restructuring and foreclosures.
Global investment management revenue increased 23% year-over-year, development services revenue was down 13% and the commercial mortgage brokerage business posted an increase of 33% and the other sign that the capital markets are gradually improving for commercial real estate. Please turn to slide 8.
Outsourcing revenue grew 10% in the second quarter of 2010 as the business returned to a more consistent long term growth rate. During the second quarter, our global corporate services business set a CBRE record with 34 contracts signed.
Also set a CBRE record with 17 new account sign, extended seven client relationships and signed 10 renewals. In total for global corporate services and asset services, our square footage under management in the first half of 2010 has increased approximately 10% to a total of 2.4 billion square feet from 2.2 billion square feet at the end of 2009.
This growth was fueled by continued strong expansion of the property management portfolio in China, increased property management assignments in the United Kingdom and new facilities management awards in Americas. Although I won't spend too much on it, we have attached slide 9, which provides certain US transaction statistics, illustrating how the outlook is improving for vacancy and absorption in 2011 versus recent historical trends.
Our estimate range of cap rates for the next 12 months show a continued possibility of modest contraction. We are continuing to see some cap rate contraction among high profile properties in large markets.
Please turn to slide 10. The steady recovery of the US investment sales market continued in the second quarter of 2010.
The $20.7 billion of investment sales volume for the quarter was the most since the fourth quarter of 2008, and represents an 86% jump from the first level of the second quarter of 2009, according to real capital analytics. Our all America sales revenue for the second quarter increased 47% on a year-over-year basis.
Our Americas leasing revenue increased by 37% in the second quarter of 2010 as compared to the second quarter of 2009. Nationally, the office vacancy rate increased again, but only by 10 basis points to 16.7% based on transactions through the end of the second quarter.
Although this is the eleventh consecutive quarterly increase, it is the smallest incremental change in two and a half years. Our net absorption remains close to zero, and is still slightly negative for the year.
Vacancy appears to be close to a new peak. Please turn to slide 11.
Our investment sales revenue in EMEA increased significantly by 93% in the second quarter of 2010 as compared to the second quarter of 2009. Total investment turnover showed a healthy level of growth between the first and second quarters of 2010 increasing by 16%.
The market appears to be regaining its appetite for large transactions, particularly in the United Kingdom and Germany. In the United Kingdom we topped those rankings for both property disposals and acquisitions for the quarter.
In the disposal category, our volume more than doubled than number two firm. CBRE's revenue from leasing and EMEA grew by 15% in the second quarter of 2010 versus the second quarter of 2009 led by Paris, Frankfurt and London.
Please turn to slide 12. CBRE's sales revenue in Asia Pacific increased by 66% in the second quarter of 2010 versus the second quarter of 2009.
This improvement was indicative of positive economic growth across the region. CBRE's leasing revenue in Asia Pacific grew by 18% in the second quarter of 2010 versus the second quarter of 2009.
Rental rates continue to show signs of stabilizing region-wide with improvement seen in Hong Kong, Shanghai, Beijing, Singapore, Seoul and Tokyo. Overall result today specific for the quarter reflect a shift in revenue mix as well as aggressive hiring in this region to support extensive growth.
Please turn to slide 13. Revenue for the development services segment was down 11% to $19.7 million in the second quarter of 2010 versus the second quarter of 2009.
Operating results for the second quarter of 2010 reflected normalized EBITDA of $28.4 million, a significant improvement over prior year that was driven by gains on the sale of two high quality properties in the Houston market. These contributed approximately $25 million worth of gains to the company in the second quarter of 2010.
In addition, there were no write-downs of cost containment expenses during the quarter. At June 30, 2010, in-process development totaled $4.4 billion, down 13% from year ago levels.
The pipeline at June 30, 2010 totaled $800 million, down 47% from year-ago levels. The combined total of $5.2 billion is down 22% from year-ago levels.
At the end of the second quarter, our equity current investment in the development services business totaled $57.4 million. Please turn to slide14.
Global investment management revenue was up 44% to $46.9 million in the second quarter of 2010 from $32.6 million in the second 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 were flat while acquisition fees increased as a result of an increase in capital deployment. Assets under management totaled $33.7 billion at the end of the second quarter of 2010, which was down 3% compared to the fourth quarter of 2009 but up slightly versus the first quarter of 2010.
During the second quarter we made $1.6 billion worth of acquisition and portfolio takeovers and $300 million worth of dispositions globally. Currency fluctuations lowered the portfolio by $600 million.
Our current investments in this business at the end of the quarter totaled $86.8 million. Our global investment management EBITDA reconciliation detail is shown on slide 15.
In the second quarter of 2010 there were no write-downs for cost containment expenses. In both the second quarter of 2010 and the second quarter of 2009, we did not realize any carried interest revenue.
We reversed the net $500,000 of carried interest compensation expense in the second quarter of 2010 as compared to the $300,000 we reversed in the second quarter of 2009. As of June 30, 2010 the company maintained the cumulative accrual of carried interest compensation expense of approximately $14 million, which pertains to anticipated future carried interest revenue.
EBIDTA was positively impacted by acquisition fees, as well as approximately $7 million associated with the previously mentioned accounting change. Partially offsetting these amounts were bad debt provisions associated with asset management fees due from a [fund].
It should be noted that the accounting change has no bottom-line impact. This business operated at a normalized EBIDTA margin of 22% for the second quarter of 2010.
Please turn to slide 16. Real Capital Analytics classified a $183 billion of commercial real estate as the strength at the end of the second quarter of 2010.
This includes properties that are troubled, including those that are delinquent or in default in lender REO or in workout. The company's portfolio of distressed assets currently being marketed for sale in the US is now approximately $7.5 billion.
In addition, to the first half of 2010, we had sold $1.3 billion of such distressed assets. We have also been appointed receivable nearly 25 million square feet of property in the US.
Please turn to slide 17. At June 30, 2010 we have only approximately $160 million of term debt amortizing or maturing through 2012.
Although we repaid minimal amounts of debt during the second quarter, on July 1 we did repay $150 million of our Term B loans maturing on December 31, 2013. This will result in interest expense savings, not only on the prepaid debt, but also on all of the company's remaining Term B loans outstanding by 50 basis points.
Please turn to slide 18. Excluding our non-recourse real estate loans and mortgage brokerage warehouse facility, our total net debt at the end of the second quarter of 2010 was $1.3 billion.
During the six months ended June 30, 2010, we paid down $56.8 million of debt, of which approximately $55 million is voluntary. This was backed at approximately $60 million for acquisitions, primarily the potion of Ikoma in Japan that we did not primarily own, that we did not previously owned and normal bonus payment.
These payments were funded by cash flow from operations which included a tax free fund of approximately $85 million. At June 30, 2010, our weighted average interest rate was 7.1% similar to the first quarter of 2010 and the end of 2009.
Our leverage ratio or net debt to EBITDA as defined in credit agreements, at the end of the second quarter was 1.69 times, well under the maximum ratio permitted of 4.25 times. Our present 12-month interest coverage ratio was 5.51 times, well in excess of the required minimum of two times.
I will now turn the call back over to Brett
Brett White
Thank you, Gil. And please turn to slide 19.
As we have described in our fourth quarter 2009 and first quarter 2010 calls, during the early days of recovery in both the broader global economic environment and most specifically the commercial real estate business. As is typical for early stage recovery, the trajectory of improvement and the underlying dynamics supporting commercial real estate is uneven.
Nonetheless, all of the significant measures we follow closely, rental rates, absorption and yield appear to be either bottoming or improving. We've discussed with you for years that our operating strategy of eliminating large amounts of operating expense during difficult times in this past downturn, $600 million, not only allows us to drive industry leading margins through the down cycle but also produces outsized results at the profit line during recovery.
Our results year-to-date across all financial measures, revenue, EBITDA and earnings once again prove our thesis. This recover cycle and the expansion cycle to come should provide solid footing for our base case EBITDA in earnings growth model.
That being 10% to 15% EBITDA growth and high teens earning growth over the long term. While our second quarter and year-to-date performance far exceeds this model, future results will be tempered from the current extraordinary levels by a steady but careful on boarding of cost to support growth, as well as inevitably more difficult quarter-over-quarter and year-over-year comparison.
As we said last quarter, our bias at the moment is that we will achieve the high end of our EPS growth model this year, and in fact may exceed it materially. However, there exists enough uncertainty in the global economic environment, and enough evidence that some of the world's major economies are slowing, that we will reserve updating our full year forecast until the end of the third quarter.
And with that operator we will now take questions.
Operator
(Operator Instructions) And our first question is from Anthony Paolone from JPMorgan. Please go ahead.
Anthony Paolone - JPMorgan
My first question is on the leasing front. Can you give us a little sense as to the activity levels you are seeing, how much of it is real expansion and real corporate activity, or leasing activity versus a CBG gaining market share, or even a little bit of borrowing from say future demand?
Brett White
Sure Anthony, well on the leasing side a couple of dynamics to think about here. First is we're in the very early days of a recovery cycle and expansion cycle in leasing.
Rental rates are still not only declining in some markets, flat in others and in a few markets beginning to appreciate. And so the pick up in leasing at the moment, is primarily new lease in revenues at the moment, is primarily longer term and greater square footage.
And that is of course typical to the early stage recovery. We're not seeing any benefit really from increased rental rates at this time.
The pretty strong pick up we're seeing in the last few transactions, and we are seeing good pick up in velocity transactions. Its a combination of two things, pent up demand left over from the downturn, but also a slow return to a more, what I would describe as normal operating environment for our corporate customers.
Those folks, who had been really in the bunker the last few years, are now dusting off their mid-term and long-term strategic plans, and beginning to think about their leased space in a more typical or normal fashion. And that leads them to enter the marketplace and begin to behave in a more normal way.
And of course, that brings us more transactions. It also brings us greater square footage in longer term.
Anthony Paolone - JPMorgan
Have you seen any noticeable slow down in any regions like thinking through Europe which is on all the folks minds?
Brett White
No, we really haven't. I think its and the operative word is meaningful.
Certainly, during the second quarter, there were in particular a few weeks where there was a very heightened level of concern regarding certain jurisdictions in Europe. We didn't see any material decline in our business activities across Europe.
Certainly, it has slowed a bit, but again I think material or meaningful is the operative word. And our view at the moment is that the sovereign debt were user issues extant and continental Europe are not going to have a particularly meaningful impact on the business in Europe for us.
Anthony Paolone - JPMorgan
On the outsourcing side, your revenues were up 10%, you had noted Asia and Europe being up pretty strong there and I can't remember the regional splits. Was the US down, or is it big enough that it was still up to get to the 10 overall?
Brett White
All three jurisdictions were up.
Anthony Paolone - JPMorgan
And then, on your expense ratios, if I look back over time, just eyeballing, it seems like in the second half of the year, your OpEx as a percentage of revenue tends to be lower than in the first half. Do you think that's something that will continue this year?
Brett White
Anthony its still yes, I think that the seasonal patterns that we've generally experienced will be evident in the second half as well.
Anthony Paolone - JPMorgan
And then, last question here. Your cash on hand, I know you spent a little bit after the quarter, paying down some debt.
But, given that you are going in the second half of the year which is when you typically build a lot of cash, how do you think about using that or how do think about just your cash position.
Gil Borok
We have to think about cash in terms of what we have domestically versus what we have offshore as we've talked about before. The offshore cash not being as readily available to us add to the pay down on July 1.
Our domestic cash is probably at about $370 million give or take going into the second half. And you're right we would anticipate building cash in the second half.
So at this point and given where we are in the cycle given that there are uncertainties, it is prudent for us to have a cash balance on hand. We don't have any accordion type debt i.e., revolver to pay down.
So to the extent we would pay down debt, we would lose permanent capacity. If you will, once you pay down term loan, that's a pay down and we don't have that capacity.
And so given where we are, we just think it's prudent to build and keep the cash balance on hand and we'll evaluate it as the year goes on.
Operator
Thank you. And our next question is from Sloan Bohlen from Goldman Sachs.
Please go ahead.
Sloan Bohlen - Goldman Sachs & Co.
First question is kind of under your outlook and just specifically the comment on, I think exceed materially that upper teen growth on the EPS. I wondered if you could talk to whether you believe that would be surprised more on the top-line or whether you think there could be lag of expenses or cost kind of ramping back up?
Brett White
Certainly year to date, the good news has been for us, the revenue line. I don't think we're ever much surprised by our expense line.
We keep very tight controls over our expenses and we rarely have actual results and expenses varying much from our internal budgeting. So, it's all about the revenue side, and we like what we're seeing at the moment.
And certainly if those trends are maintained full year then our bias as we said is going to be to have some pretty terrific results. However, I think it's only fair to say at this point in the year that there is enough uncertainty out in the general economic environment.
But it's prudent to wait till the end of the third quarter to provide you with any material update to our thoughts about full year.
Sloan Bohlen - Goldman Sachs & Co.
Okay. But will it be fair to say that the segments that could potentially surprise in the upside would be probably more of brokerage businesses being transaction activity, or leasing activity in the back end of the year?
Brett White
It's fair to assume that at this point in the cycle the likely upside surprises are going to come from transactions, that's where the biggest market lift is, right now because we're coming off of such really miserable comparison from 2009 and 2008. Now that having been said, we've had some really pretty good news coming out of our other businesses as well.
We like what we're seeing in our investment management space. We've raised close to $3 billion of capital this year, we deployed a similar amount.
Those are good pieces of news for us. We're seeing our development business in the second quarter had some really terrific realizations.
They added meaningfully to our results. Our mortgage business is showing some good signs of recovery.
So, we really are at that point Sloan in the cycle where we're seeing broad-based recovery. We could have upside surprise really in any business line but you're absolutely correct Sloan, absolute numbers in terms of surprise will likely come from the transaction businesses.
'
Sloan Bohlen - Goldman Sachs & Co.
And then, kind of along the line to Tony's question and kind of fitting it with my previous question. As you look ahead, maybe outside of just earnings and outlook, over the next two or three years.
If you were to pick a segment where you'd like to have more exposure? In the past, you've talked about doing larger type acquisition.
How do you think about growing the business I guess outside of your organic growth?
Gil Borok
First of all, we benefit from the fact that we are everywhere we need to be. We're in every business line that we want to be in and we're the global leader in virtually all of those geographies and business line.
So, it's a huge benefit to us to not have to spend the money, discretionary capital to land our footprint and let me just start with that. Now that having been said, growth for us is going to come from a number of different areas.
First and foremost you share growth, and we are seeing quite good share growth in a number of our areas. I think you and the other callers are well aware that in New York for example, we did eight of the top 10 leases in the first half of the year.
We did 23 of the top 50, that's more than number two and three firm combined. We were named again the number one investment property dealer in the United States by Real Capital Analytics.
In London, we again were named the number one firm in acquisition, disposition and leasing. So we are capturing meaningful amount of share, we are enjoying terrific lift organically from the market recovery, and we are also looking at areas to take advantage opportunistically where we are in the cycle.
And those areas could include such items as acquisitions. And as we said on the last call, the marketplace for acquisitions at the moment is relatively thin, that having been said there are opportunities in the marketplace and we were watching them carefully.
We are taking advantage of cyclical business alliance such as our restructuring business line, which we have $7.5 billion of distress that we're working on there and that's a business line that is doing quite well at the moment, but it has a life and that will dwindle off over time. The outsourcing space as big as it is for us, it's very large for us with more than twice the size of our nearest competitor in terms of square footage managed.
There is a lot of space there for us to grow and we are doing so. So I think you will find that our growth is going to come from a variety of different areas, both organic and non-organic.
The investment management space which I referenced earlier is an area that there is no better time than now for RLPs to grow investments in commercial real estate, and we are very, very active in that area. So we are very excited about where we stand in the cycle, and seen lots of areas for both organic and inorganic growth.
Operator
Thank you and our next question is from the line of Will Marks from JMP Securities. Please go ahead.
Will Marks - JMP Securities
I wanted to ask I guess first on the development line. I'm a little confused you showed operating loss, but you recognized some gains, did those gains impact?
Is there any extraordinary impact to the $0.18 of EPS that you would attribute to development?
Brett White
Yes, well I think the best way to get you on to line development is because of the accounting rules. Sometimes when we have a sub you may recall, we haven't had those in a few quarter, but if you think back on a consolidated deal we have to sometimes break it out of discontinued operations.
We also get gains through equity earnings, so when you look at the face of the press release, their income statements are a little tough to follow, I'd admit. That is all included in EBIDTA in the slide.
And obviously, that did have a contribution we quoted a number of $25 million of gains associated with those sales. So, that should give you some insight into the impact on the quarter.
Will Marks - JMP Securities
Would that be a pre-tax gain?
Brett White
That is pre-tax.
Will Marks - JMP Securities
So if you tax adjust that I think it ends up to be something like $0.04, does that sound in the ball park?
Brett White
That sounds in the ball park, yes.
Will Marks - JMP Securities
And then on I guess this was kind of covered but on acquisitions and how that ties into using your cash, seems like the balance sheet is pretty safe and I know maybe the preference is to pay it on debt a little bit more. But what specifically would you be looking for if you are number one in so many markets, and in so many business segments, is it expanding investment management or I mean, you mentioned there's not much available, but can you be a little more specific on what would add to the model?
Brett White
Sure Will in the end just to remind everybody there are really two types of acquisitions that firms like us make. There is strategic acquisitions, where we've identified a gap in the platform or an area that we want to bolster and we go out and look for it, firms that can help us there, Trammell Crow and Insignia are examples of those types of acquisitions as you're well aware.
The other type is opportunitistic, and these are opportunities that come to us and those types of opportunities tend to be infield firms that have for whatever reason decided that they are having a difficult time competing, and they want to roll up into one of the larger firms. And we see opportunities in the mid-term in both areas.
Strategically, we see opportunities in investment management. We see opportunities in some of the capital markets, spaces that we operate in.
And we're watching those and paying close attention to what might be available out there. Opportunistically, I believe it's fair to say we are the buyer of choice in the industry.
We have a great reputation as a firm that integrates firms well, have a high respect for the culture and the people that we integrate in. And so we're contacted really all the time by mid-size and smaller firms that are looking to roll up and we're taking stock of those and paying close attention to those.
Based on where we are in the cycle, there are actually fewer opportunities available today than there might be. As the cycle becomes more mature, the reasons of course is that the valuation against businesses today.
We are very conservative on our valuation. And most firms today are not particularly interested in selling against the kind of valuation that are available in the marketplace.
But we are watching all that and I would love to give you more specifics. In fact we're looking at these seven firms in these places, but obviously as a competitor issue.
But I think it's fair to say that we have been by far the most acquisitive firm in the industry for decades. We intend to be so going forward.
Will Marks - JMP Securities
One final question, on completely subject. On retaining employees, I know it's a challenge.
There is a lot of companies out there that are trying to add people and how are you competing in this way. It's not on providing higher splits, I know that.
Then I know you have a great brand reputation, but I'll let you answer the question.
Brett White
First, in terms of retaining employees, we really don't have a real issue with retaining our best people. The folks that, and I'm going to generalize horribly here, Will, but I need to.
Generally, the folks that we lose or folks that probably are not hugely disappointing to us to lose; if they are in play, it's because they are dissatisfied with their business or things have changed for them and they would like to try and improve their life somewhere else. And in most cases, that's kind of okay with us and probably okay with them.
In the few cases where we'd lose people that we like quite a bit is because they're offered really incredible sums of money, non-economic terms to leave. And in those cases, we're not going to compete with that.
If firms want to pay people that kind of money to walk across the street then they should do so and we're going to let those people make those moves. But generally speaking, Will, we use this analogy for so many years but these firms really are a lot like sports teams.
Being the number one firm in the business that what people want to be. And to walk away from being with the number one firm to be, number two, or three, or four, or five, requires an inducement.
And in most cases it's a pretty serious inducement. So on the retention side, the best thing we can do to retain our people, and we've always done this, is to make sure we have a dominant firm in the business, that we have a platform that is compelling.
We have a culture that is supportive and nurturing, and we think we have the most culture in the business. And certainly we've been ranked that way for a number of years.
Look at the list you survey and others; a lot of reasons why staff at CBRE is happy to be here. In a market like this, what you will find is that as we enter recovery, firms that have gaping holes in their platform or significant weaknesses in certain markets, need to and will spend whatever it takes to recruit people over to fill those gaps and you are seeing some of that right now.
But again, at our firm given the size of the business, a broker leaving here or a property manager leaving, it doesn't move the needle. Of course, we're sorry to see some of those people go, but it's okay.
Operator
Thank you. Our next question is from the line of David Ridley Lane from Bank of America.
Please go ahead.
David Ridley Lane - Bank of America
I had a question on Americas leasing. We're still seeing pretty weak employment trends in the US.
And just wondering as the market normalizes, what's kind of longer term growth rate for the Americas leasing business if we continue to see this sub par employment picture continue say into 2011?
Brett White
It's actually a very good question David and it's something that we think a lot about. Every cycle both down and up is different.
And this particular radical recovery phase, we're showing not into expansion phase yet. This recovery phase is anemic in terms of GDP and job growth which makes it a bit unusual.
And I think it's a very good question to try and think about if job growth stays where it is, what impact that has on leasing. Let me first say that our projections on the leasing business and leasing market, is that they will steadily improve as we move through the recovery phase and into expansion phase.
The long-term growth rate that I think would be fair to think about in terms of leasing revenues is something in the high single digits. Certainly if look over, the data that we track and the results that we have produced year in, year out for many years, you would, I think you would pretty quickly come to conclusion that in recovery phase, you're going to see some slight up and in the long term expansion phase, you are going to see revenue increases in leasing in that high single digit range.
You're going to see some years you have outside gains. You probably won't see years where you have much less than that.
David Ridley Lane - Bank of America
Okay, that's very helpful. And then in thinking about this in your commentary, I think you said that not much change in rents.
The rents aren't really helping yet. When would you expect again, assuming that we continue to have anemic job growth here in the US, when will you expect rents to start to increase and you get a little bit even faster velocity on the leasing side?
Brett White
I think the right way to think about this is, I going to give you a directional answer because like give you a quarter I maybe wrong. Directionally, it is correct to characterize the markets as bottoming.
It is also accurate to say that most markets are seeing rents flat or nominally up. We believe that you will see positive rent changes in the relative near term in most markets, and I would characterize that as late this year early, mid next year.
Now it maybe nominal, but nonetheless moving to a positive from a negative is a very important inflection point in recovery. And we are very close to there in most markets.
I think one of the structural dynamics to keep in mind here is, new construction is virtually absent in most markets around the world in most product types. And that has been a huge supporting dynamic behind the amount of decline in rental rates, and what we think will occur in appreciation of rental rates.
But certainly, on the office side I would expect that you are going to see some rental increase fairly soon, and across a number of the markets. Rents take EMEA as an example, of the 55 markets we track in EMEA, right now rents that are stable or rising in 49 of those markets.
So you really are at that point where we're in inflection point in most markets, and we should be getting some help from rental rate appreciation very soon.
Operator
(Operator Instructions) And our next question is from Brandon Dobell from William Blair. Please go ahead.
Brandon Dobell - William Blair
Couple quick ones for you. In the leasing business, and I guess primarily in the US, but also within EMEA, a little more color on what kinds of property types you're seeing particular strength or weakness?
Or perhaps if there's any market difference between the tenant-rep side of the business and the owner side of the business?
Brett White
Sure, in terms of product type I think the best way to answer your question is where we are seeing strength, or I suppose recovery and that would certainly be in office retail. Industrial, we have a number of markets where industrial is suffering from some fairly significant vacancies and those markets are a bit more tight for the way from seeing rent appreciation.
But certainly, the office property market as you would expect in early stage recovery is the services firms that were probably least hurt in the downturn. It's the services firms that are usually quickest to begin hiring again, and begin thinking about expansion again and that's primarily office.
So I would say that's the area that we would look to primarily, geographically we are enjoying good recovery in almost every global market. It is fair to say that Asia certainly, came out of this first and the markets like Singapore, certain markets in China such as Hong Kong, London, Paris, these markets are doing quite well on the leasing side again with a focus on office.
In terms of landlord and tenant, I think what your, correct me if I'm wrong what you are asking is the question regarding our revenues? Whether it's coming from landlord or tenant because its, I'm not sure I'm following the question?
Brandon Dobell - William Blair
I guess it was more about within your customers are you seeing more strength from your relationship with tenants or are you seeing, I guess that's probably more directionally where I was trying to go with it.
Brett White
Sure, we do such a significant amount of business in the major marketplaces that we're enjoying good growth from both categories of clients. It has certainly been a tenants market, the past few years, and I would say that certainly in the last couple of years, what business has been out there on the occupier side has been occupier focused.
And that's because you see inducements for tenants to come into empty buildings, disproportionate commissions paid to tenant rep brokers, and that is the case today. That will begin to even out as the markets normalize.
The leasing markets generally, they are coming back to a more normal footing and we are seeing good strength both on the owner and occupier side.
Brandon Dobell - William Blair
Maybe a question I should refer for both of you, if you think about the relative attractiveness of the outsourcing facilities management business relative to the brokerage business I'm thinking about capital efficiency, revenue visibility, probably make some good arguments for both ways for why outsourcing is a good business. I guess I'm most focused on the amount of capital that you have to put in that business.
And what the newer contracts or renewals are telling you about the margin opportunity as you look out the next couple years?
Brett White
Let me take half that question. I'm going to let Gil talk about capital deployed because it's not really a huge issue.
But, in terms of desirability, I think that in this business if you want to be a global leader in commercial real estate services you need to have both legs of that stool in a very big way. You need to have a strong outsourcing capability because we really are getting to an environment where virtually every major corporation is looking at outsourcing in one form or another.
So, if you're not in that business in a big way, you are just locked out of an ever greater percentage of the large corporate customers that are out there. On the transaction side, you have to have a very, very strong capability in transactions in all the major markets because at the end of the day what both your corporate customers and your institutional owner customers must have from you is demonstrated expertise and complex difficult negotiations and transactions across product types, or having both is critically important.
The margin opportunities in those businesses are both very attractive. Now the way we account for those businesses, we tend to bolt most of the transaction revenues that we generate from our outsourcing business and our brokerage business lines.
So, our reporting margins in outsourcing really don't reflect the true, I'd say holistic margins of those clients, because a lot of the juice of the margins comes from the transactions we do for those clients. And we put those revenues over in the brokerage space.
I think it's fair to say that both businesses provide very attractive margins to us. And certainly, what we saw the last few years is that having a market leading outsourcing business is extremely helpful in down markets.
We're seeing now that that business is a growth driver in good markets. But let me let Gil address the question on capital usage within the outsourcing business.
Gil Borok
Sure, and Brandon if you look at CapEx in our financial statements, it might be a little bit deceiving in terms of the CapEx spent on the transaction business versus outsourcing for the simple reason that all of the capital expenditures which as you know in total are pretty light and not particularly meaningful, but we would show the capital expenditures on that line item. And then, in many cases in the outsourcing business, that's reimbursed to the revenue line.
So, it decreases if you will on a net basis, the capital spent on the outsourcing business. That said, I would say without a lot of quantitative analysis, it's probably not, it's certainly not more draining on our capital expenditures than the brokerage business, and we really only have two areas that we spend, which is lease-hold improvements in a meaningful way, lease hold improvements and information technology, IT.
Brandon Dobell - William Blair
And then final question. In terms of head count on the brokerage side of the business, some sense of where you guys are now relative to where you were a year ago or even a couple of years ago, just trying to get a sense of how, especially if any color by geography will be very helpful as well.
Thanks.
Brett White
Sure. Well, again, I really believe this is one of our competitive strength in the industry which is, we've enjoyed a compensation model in our brokerage business for decade.
That provides us with the opportunity to weather down markets without any real need to reduce our head count in the brokerage space. As an example, our head count today in the US brokerage space is within a percentage point, not really a rounding of where it was in 2008.
We have in one of the nice credit supporting dynamics to our businesses, right and this is something that we've shown for years. The capacity to grow revenues over this base of fee earners is almost limitless.
Certainly there is a limit to it; we've never hit it. And so as we see the very strong organic growth which we expect to see during this recovery cycle, we don't have a need to onboard fee earners.
Our brokers around the world, our fee earners around the world can take on that business and we'll do a very good job of it. And I don't expect that our headcount in brokerage professionals globally is going to move much in the next few years.
Now, if we do an acquisition of course that's different, but we are not really in the business of adding brokers to our platform. We are in business of improving the ones that we have, and we will move out lower performers and recruit higher performers in.
But one of the really amazing statistics around this business is around our business is because of this compensation model we got for years. We can onboard significant revenues without increasing much headcount, or able to weather significant downturns without reducing broker headcount and we didn't really reduce any broker headcount the last few years.
Operator
Thank you, we do have a follow-up question from Anthony Paolone from JPMorgan. Please go ahead.
Anthony Paolone - JPMorgan
Thanks. Gil, I was wondering if you could just help us a little bit on the equity income line item just because I know you had some gains in there that came through that line item.
I guess if you strip that out what should that be on a normal basis just because it's a little bit of a mystery and tough to model.
Gil Borok
Yes, you've got two things going on. On the one hand, this year you do have a gain going through, but that was in the range of about $12 million.
On the other hand, last year you've got impairments in the number because you are looking at it on the face of the financial and that's a GAAP basis. So we had impairments last year running through that line.
But I guess what I would say on a quarterly basis generally speaking, I would say without those types of extraneous events, and we always seem to have them I know, but on a run rate basis it's single digit moving into the positive.
Anthony Paolone - JPMorgan
Okay. That's helpful, and then just last question just more practically about the development business and where that gain came from.
What do you think the next few quarters have in store for selling assets that you may have co-invested on the development side in, and/or, can you even give a sense as to maybe what that mark-to-market is on the $50 million some odd that you've got in equity in that business?
Gil Borok
Sure, well in terms of the two sales what I would tell you is they were high quality assets, well leased in the Houston markets. So, kind of all of the things you think about at this point in a cycle, the attributes that you think about of an asset that would sell, these assets had.
And so, they happen to hit within the same quarter. I would say that there is possibly more sales in the future, but nothing definitive.
So I would say it is not indicative of the trend necessarily. And I would sort of leave it at that.
Anthony Paolone - JPMorgan
Do you think there are more danger, do you think the value of those positions that you have in the embedded gains are anywhere near kind of what you experienced in the second quarter? Because if I look at what that investment was last quarter I think it was $60 million some odd and it went down to $50 million some odd so I'm assuming that I think it was an $8 million change that that was your equity in these two properties that you sold and you booked a $25 million gain.
It's a pretty substantial gain over seemingly what you had into it. Like, just wondering, like is that typical?
Gil Borok
One of those properties was consolidated and one of those was a co-investment. So to the extent the gain it was split pretty much evenly between the two, so to the extent that the gain came through for the consolidated property.
That actually reflected in discontinued operations. To the extent it was related to the property where we co-invested, it came through equity earnings.
But more generally speaking, I think this might answer the question, in terms of the co-investment that we have which is reflected in the slide deck, we don't anticipate seeing anymore significant write-downs. There maybe one here or there, but we don't expect any significant ones and that should be indicative in terms of where we think the values are relative to our portfolio.
Operator
And at this time, there are no further questions. Thank you; please continue with any closing remarks.
Brett White
Thank you operator and thanks everybody for participating on the call. We'll talk to you next quarter.
Operator
Thank you. And that does conclude our conference for today.
Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.