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CB Richard Ellis Group, Inc. (CBG)
Business Review Day Conference Call
November 16, 2011 9:00 am ET
Gil Borok – Executive Vice President and Chief Financial Officer
Raymond Torto – Global Chief Economist
Matt Khourie – President
Michael J. Strong – President, Europe, Middle East and Africa (EMEA)
Michael J. Lafitte – President, Americas
William F. Concannon – Member, Global Executive Board
Mary Ann Tighe – Chief Executive Officer, New York Tri-State Region
Robert Blain – Chairman, President and Chief Executive Officer, Asia Pacific
Asieh Mansour – Head of Americas Research
Previous Statements by CBG
» CBRE Group's CEO Reviews Completion of ING Real Estate Investment Management Operations in Europe - Conference Call Transcript
» CBRE Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript
» CB Richard Ellis Group CEO Discusses Q2 2011 Results - Earnings Call Transcript
Good morning for those of you who don’t know me, I’m Gil Borok, CFO of CBRE; not CB Richard Ellis anymore, but CBRE. I'm going to give a brief financial overview, wouldn’t be a business review, I can do that.
So you’re going to have to sit through me in order to get through the more interesting speakers, and we do have a great line up, you can see the agenda; like the new speakers we have some speakers that we are, have been with us for a couple of two years particularly from both Europe and Asia as well as Mike Strong and Rob Blain are both here.
So we’ve got a very interesting line up, and we have the – myself and Rich and others have the pleasure of sitting through it yesterday, and I think you will find it very captivating and interesting, and you will have insights today that as you know, you don’t normally get to us here and don’t certainly have access to all of these folks who are kindly with us today. So with that I’ll get started.
You know the forward-looking statements, and I won’t go through those. But just starting with our global market leaders slide, and I’ll just pick highlights. I think you can see, we’re putting green that we are number one in commercial real estate investment management, that’s pro forma for 9/30.
Obviously, with the acquisition of the ING REIM business, that has now put us in the number one position in that line of business, we were number one in all of the other lines of business prior to the ING REIM acquisition. And so we are highlighting that for you, because it’s an accomplishment of 20 plus year objective of the firm. And so you will see a lot more about that from Matt Khourie later this morning. But that’s the reason we wanted to highlight this slide as the standard investor slide that many of you are aware of, and we are proud to now call us number one. We have a footnote that says pro forma 9/30 in our footnote.
We are two times our nearest global competitor, public competitor but lower in terms of revenue. And in this business, many of you know that size matters and you would see a lot about size and scale and specialization during presentation.
This is again a slide many of you have seen, but our vision, which is coming to fruition and we continue to work with, it always continues the improvement in CBRE. But to be the preeminent vertically integrated globally capable commercial real estate services firm.
So definitely, to do all things real estate for owners and occupiers as represented by the wheel and our objective is to be in every major world city, leading position in every world city. In the services we provide, having the best people, we’re training them, which is what you’d expect the service business to do, protect our brand fiercely and capitalize on it, maintain integrity at all times, and last but not least, maintain industry leading margins.
That slide is core to that, what we do, we talk to a lot of you about that in terms of managing costs relative to revenue, and maybe at least sometimes we do better at it, sometimes not as good. But the overarching desire and the overarching culture is such that we manage our costs relative to revenue movement, and not the other way around, we don’t spend before the costs come in, and when we do, we certainly try to manage and pull back as you see and realize this year in the second and third quarters in particular.
Diverse client base as you know, 40% plus corporations, insurance companies next and pension funds and I pointed out; last I believe government was 3%, now 5%. That has at least impart to be with economy, but impart to do with our expanding business in government in the GCS or corporate outsourcing business. You will hear a little bit about that from Bill Concannon in a little bit, the best one, sort of slides that I would point out and let you know that it is and continues to grow.
As you know, we’re geographically diversified, some people look at and said, we’re 60% in the market. That’s not a good thing. Well, it kind of is when 60% of the business more or less is in the Americas and the maturity of the Americas market, particularly the U.S. in a lot of our service lines is more mature than it would be in Europe and Asia. But we got very big and growing businesses there in EMEA, almost 20% of our revenue is now in Asia-Pacific 15%. So we like the pie and it doesn’t mean it won’t change; and many of you’ve heard this before, it doesn’t mean it won’t change overtime, but right not we feel it’s the correct size.
Here is service slide, you can see the slide but we did that over trailing 12; 9/30. A few things to point out on a trailing 12 basis as of 9/30, the Property & Facilities Management business and the Leasing business were about the same size in terms of the pie up to 33%, 34%.
Sales was only 16%, many people worry about possible service data in the economy and so forth that might have a significant impact from a slow down in capital markets. We’ve seen that in Europe – for both, the reality is that’s only 16% of our revenue on a trailing 12 basis. When you saw what you saw in 2008, that number was significantly bigger, of course it’s a 30% or 35%. And so of course the impact on our company at that time was significantly more than it could be relatively more of a slowdown now.
So I think that’s an important point, and of course that will be at service lines showing there, get quite a bit smaller assets sales. Revenue diversification we make this point, we continue to look to moving our business more towards contractual avenues, the ING REIM acquisition for some of that goal were close to 50% contractual, non-contractual as defined. In this case sales recent mortgage brokerage are considered non-contractual, the other business is contractual, though I will admit there are pieces of those other businesses that are not contractual, but by and large contractual. So just for purposes of depicting the factors, there is a lot of change since I said, prior to the Trammell Crow acquisitions to today where we’ve moved much more toward contractual revenues and all of the things that come with that and the benefits that come with stable revenue sources.
Just a word on our competitors, we don’t comment much on our competitors. We’re trying not to, but it’s hard not to put a slide like this up, where as I said it still matters, and you can see that we are the largest by long short, not only the largest, but look at our margins 7.8%, as the video try to save check in terms of industry leading margins so far so good, we've seen that over time.
Interestingly, if you look at C&W and you look at Grubb & Ellis and the only thing I’ll say it is, they’ve been losing money in an up market so I wont say more than that other than state that fact and you can see that several of these are there in the UK market, which is somewhat of a fragmented market perhaps more so than the U.S. have that middle tier firm level have shown positive, financial positive features than just a little bit and for smaller firm have shown positive results through I think is [clearly] on the slide.
This chart many of you have seen, we’re hovering a 13% margin rounding up on a trailing 12 basis as of ’09, 13.3% margin in 2010. The point I make here is that the margin trailing ‘12 in 2010 is looking kind of between ‘04 and ’05 with a very different business model. With a business model today that significantly move way to contractual outsourcing revenues where the margins are lower. I think everybody acknowledges that.
And so, I would content that in order to achieve the margins that we are achieving at this point in the cycle, if you kind of look at ’04, ’05 and say, well that’s mainly where we are depending on who you are at, but clearly on a long-term up cycle as we are at early stages of, we’re doing pretty good on the margin lines, we still do have the aspirational goal of 20% and that’s got to come later in the cycle when the transaction businesses are significantly bigger part of the pie, when we would have presumably carried interest revenue falling to the bottom line with expense taken in the earlier years, because that’s how we have the accounts for that business. But you see over the long term with respect to the cost point, revenues have risen 16%; and we’ve seen EBITDA growth of 22% indicating the operating leverage inherent.
Here is the amortization schedule in terms of our debt, we now have the C and the D debt which was used to fund the ING REIM acquisition as well as term loan A one that closed after the quarter closed November, the trends that was $250 million effort that turned into, $300 million effort turned down our banking partners if they were kind enough to get us an additional $50 million we took it and think as a good way and we will have it there for future use, I know that way for us to make capital before we need it, but we have gotten smarter and have the right to get smarter and we have some good people thinking about these things, and you will see us we do it but right now it’s more specific purpose.
This is just the cap our pro forma there on the left side, pro forma as of 9/30 so we can see that the A1 is in there at close to $300 million there is no little bit of fees that’s the trend from 9/30 the big change from 9/30 different cash movement there as well because of the ING acquisition. Bottom line net debt $3 billion, just over $3 billion, and the ratio is right around 2.5 times, which is what we told you would be, I think it’s a little higher than that the net debt to EBITDA ratio but if you add in the proclaimed EBITDA from ING then you get to about a 2.5 times and certainly by the end of the year.
The outlook, this hasn’t changed which you saw in our third quarter but when we reiterate, early stages of recovery notwithstanding the sovereign debt issues in Europe and the potential uncertainty and slowdown in the US outsourcing fundamentals are strong, investment sales are continuing to grow (inaudible) but continuing to grow. Leasing (inaudible) that’s usually what happens in the cycle, but more focused on costs, but balanced with growth, balanced with strategic recruiting, which we feel appropriate at this time. We still maintain our guidance at $0.95 to $1.05
And then here is an appendix for those of you that are data house and ask for this, we had no way to publicly give you this. We gave you outsourcing growth for the first time in the third quarter. And we had no way, no good way, it’s only give, there is no good way to give it to you and produce it publicly for the full year of ’10 first quarter of ’11 and second quarter of ’11. So I’m just going to take through these and the product that undertake us again and so that it will go on an 8-K, which this has been filed.
So thank you for listening to some of things that many of you know and hope that there are few interesting points but more to come that will be a lot more interesting in new and fresh. And with that, we’re going to go to an economic and real estate outlook, I’m going to introduce someone you are familiar with, most of you Dr. Torto, Dr. Ray Torto and he has somebody who he is going to bring out, who you will hear from as well, but I will introduce in a moment, that’s Asieh Mansour who has joined us as Head of Americas Research.
Ray as you know is one of commercial real estate most renowned economist and forecast, he directs our worldwide team of commercial real estate market analyst and we got timely question on macroeconomic issues and the global commercial real estate market. He is currently Chairman of the Pension Real Estate Association and the Research Committee of the Real Estate Roundtable and teaches at Harvard.
Asieh, is a U.S. Commercial Real Estate market analyst, in the Americas actually say and provide insight to the America’s leadership team on economic issues and serves as a member of Americas operating management board, working with Ray on global initiatives. She’s got more than 20 years of experience as a leading real estate economist and was previously with RREEF and we are very happy to have her, so I could ask Ray and Asieh to come up and we will go to the economic section of the presentation.
Good morning. Just want to make sure we have people out there, come on and joint us. Hi thank you (inaudible) as you know I don’t want this size of the room to feel like we are paying attention to you. So, I think as you know we have been investing quite a bit in our research function to make it globally capable, vertical integrated and preeminent following our vision. And in that light we have been investing and collecting data around the globe in about 220 markets right now, putting that into world wide applications basically on the web and so we can take information at the dealer level aggregated up to the sub-market level, aggregate that up to the city level, aggregate that up to the country level, aggregate that up to the regional level and look at it globally.
So, we can help or occupy an investor client at the micro-level all the way up to the macro-deal. So, in doing that investment we have also been investing in personnel and so I am very pleased to have Asieh Mansour, with me today who is our head of research in the Americas. Asieh is one of three people we have heading up the three major regions of the world, and the other two, Nick Axford in Hong Kong, Asia and Peter Damesick in EMEA. All three of our leaders have PhDs, have over 20 years of experience in the business and can provide very strong analytical insights to our key partner and our investor clients. So today we’re going to look not at the micro level, we’re going to look at the macro levels, so macro has been a big part of the headlines and we’ll talk a little bit about that this morning and I'm very happy that (inaudible).
Unidentified Company Representative
The way that we decided to provide the presentation is I'm going to talk about the outlook for the economy given all the volatility and what our (inaudible) with some of the risk and I am very talking about expectations out for global and for the commercial real estate market both from an investor and occupier perspective, and then I think all the way towards the end the Q&A.