CB Richard Ellis Q4 Earnings Call Transcript

123jump.com Staff
19 Feb, 2009
New York City

The real estate firm reported quarterly revenues declined 30% to $1.3 billion and net income plunged 94% to $6.5 million in the quarter. Earnings per share decreased to 3 cents from 54 cents a year ago quarter. Gains from disposition of real estate were $4.9 million.

CB Richard Ellis Group, Inc. ((CBG))
Q4 2008 Earnings Call Transcript
February 11, 2009 10:30 a.m. ET

Executives

Nick Kormeluk - Senior Vice President, Investor Relations
Brett White - President and Chief Executive Officer
Gil Borok - Executive Vice President and Interim Chief Financial Officer

Analysts

Anthony Paolone - JPMorgan
Jay Habermann - Goldman Sachs & Co.
Brandon Dobell - William Blair & Company
Vance Edelson - Morgan Stanley

Presentation

Operator

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the CB Richard Ellis fourth quarter and fiscal year 2008 earnings conference call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. If you should require any assistance during today’s call, please press “*” then “0” and an AT&T operator will assist you. And, as a reminder this conference is being recorded.

At this time, I''d like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr. Nick Kormeluk. Please go ahead.

Nick Kormeluk

Thank you and welcome to CB Richard Ellis'' fourth quarter and fiscal year 2008 earnings conference call. Last night we issued a press release announcing our financial results. This release is available on the home page of our website at www.cbre.com. This conference call is being webcast live and is available on the Investor Relation section of our website.

Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archive audio of the webcast, a transcript and a PDF version of the slide presentation will be posted on the website later today.

Please turn to the slide labeled forward-looking statements. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our momentum in and possible scenarios for 2009, future operations, expenses, financial performance, performance under our credit facilities and our ability to negotiate, to renegotiate the terms of our credit agreement and cost savings. These statements should be considered as estimates only and actual results may ultimately differ from those estimates. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of these forward-looking statements that you may hear today. Please refer to our current annual report on Form 10-K and our current quarterly report on Form 10-Q, in particular any discussion of risk factors which are filed with the SEC and available at the SEC''s website at www.sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today.

We may make certain statements during the course of this presentation, which include references to non-GAAP financial measures as defined by SEC regulations. As required by these regulations, we have provided reconciliations to these measures to what we believe are the most directly comparable GAAP measures which are attached hereto within the appendix.

Please turn to slide three. Our management team members participating today are Brett White, our President and Chief Executive Officer, and Gil Borok, our Executive Vice President and Interim Chief Financial Officer.

I will now turn the call over to Brett.

Brett White

Thank you, Nick. And please turn to slide four. Before Gill gets into the deck, I thought it would be appropriate to begin our remarks today with a brief commentary that simply acknowledges the current environment for our business and our industry.

Throughout the fourth quarter of 2008, the headlines for the U.S. economy have included continued significant job losses, which are expected to continue into 2009. Due to these job losses, pay decreases and other factors, consumer spending is down and consumer savings are up, negatively impacting the short-term financial performances of businesses across a wide variety of industry.

As a result, the contribution to GDP growth made by consumer and business spending has dramatically reduced. Many providers of equity or debt financing for any type of assets have shut down their investment activities because of uncertainty about the future and concerned about asset values. Most economies around the world are experiencing similar challenges.

So, what are the results for the commercial real estate industry? For most asset classes in most markets, absorption has decreased significantly and vacancies have risen. Rent growth has slowed and many of us are planning for negative rent growth.

Development of new products have slowed to a near standstill. The difficult financing environment has significantly reduced asset sales velocity and resulted in significant decreases in asset values.

As we look to 2009, we anticipate that capital markets activities will remain weak, leasing conditions will remain soft and the industry will continue to experience higher volatility in sales activities. Despite these extremely challenging global economic conditions, our broad service offering and global scale contribute to our ability to maintain solid profitability. Overall, we are very pleased with our operating and financial results for the fourth quarter and all of 2008.

For the fourth quarter, our normalized EBITDA was $223 million and for the full year, our normalized EBITDA was $601 million. Just to put these results in perspective, 2008 ranked as the third best year in terms of normalized EBITDA in our firm''s 100 plus year history. As I have discussed on previous calls, we have achieved these results through continued focus on a couple of basic fundamentals in our business.

We seek to gain market share through a downturn as producers and clients continue to migrate to quality service platforms in difficult times. We continued to gain market share in the fourth quarter, as evidenced by our performance in the investment sales business. Our share there was more than the number two and three players in the market combined.

We aggressively manage costs. As Gil will describe in more detail, we have more than doubled our previously announced cost reduction efforts to a run rate reduction of approximately $385 million. This allowed us to maintain very solid normalized EBITDA margins, which at 11.7% for the full year 2008 exceeded the EBITDA margins of the last downturn by 330 basis points.

Today we have the largest and by far, the most profitable commercial real estate services business in each of the three major regions of the world - Americas, EMEA and Asia Pacific. We operate this business on a normalized EBITDA margin that materially exceeds the norm among our global competitors. This provides strong evidence that our cost control efforts are working.

Our full year 2008 GAAP financial results are impacted by several items that are not considered in our normalized results. Integration costs and merger related charges as well as other expenses related to CBRE''s acquisition of Trammell Crow Company; severance and related cost incurred in 2008 in conjunction with our cost cutting efforts; approximately $100 million of noncash expense, resulting from write-downs of impaired real estate investments, primarily in our Development Services and Global Investment Management business. We will discuss these a little later.

And finally, noncash expense resulting from write-downs of impaired goodwill and other non-amortizable intangible assets that we are carrying on our balance sheet. The GAAP results discussed in our earnings release and on this call do not yet reflect any such write-downs. We are still performing the required analysis on the value of the goodwill and other non-amortizable intangible assets.

However, based on a variety of factors, including the relative amount of goodwill we have on the balance sheet, compared to the company''s current market capitalization, we expect that these noncash write-downs which have no effect on covenant EBITDA will be significant. Gil will speak more about these matters in a moment.

The full year 2008 results of our Global Services business in the Americas, EMEA and Asia Pacific were impressive, given the conditions in our industry and in the major economies around the world. In the Americas, our revenues were $3.2 billion. Normalized EBITDA was $385 million and our EBITDA margin was 12%. In EMEA, our revenues were $1.1 billion; normalized EBITDA was $116 million and our EBITDA margin was 10.7%. In Asia Pacific, our revenues were $558 million; normalized EBITDA was $53 million and our EBITDA margin was 9.5%. While these results are off materially from last year, they are certainly very strong by any competitive measure.

With respect to our Global Investment Management business, which posted full year normalized EBITDA of approximately $30 million, we experienced an unusually difficult year. Our business model in Global Investment Management relies heavily on asset acquisitions and dispositions to provide highly profitable incentive fees. Asset sales all but disappeared in 2008. Therefore, while this business produced positive normalized EBITDA and should do so again in 2009, our overall revenues and profitability in this business declined significantly from prior year levels. We expect this business to experience rapid revenue and profit growth once again, as soon as the asset sales market stabilizes and velocities increase.

In Development Services, our normalized EBITDA was $18 million compared to $12 million in 2007. The financial results for this part of our business were impacted by reduced asset values and decreased velocity of asset sales, which reduced the gains, we would otherwise have expected to recognize upon the sale of our development projects and versus prior year. Many of these gains are not included in normalized EBITDA, due to purchase accounting rules.

The reduced asset values also resulted in our recognizing a bit over $49 million in noncash asset impairment write-downs, despite the relatively conservative capitalization of our inventory of development projects. While current market conditions create a difficult profile for this business in the near-term, we believe the aggressive cost reduction actions already taken will significantly improve the prospects for return to profitability for this business.

Given the severity and longevity of the current industry downturn, we have continued to spend considerable time managing our balance sheet. On past calls, we have discussed the company''s debt covenants. Credit covenant compliance is an issue faced today by many companies, operating across most industries. In fact, at least two of our largest public company competitors sought and received relief from their debt covenants in 2008. We have focused and will continue to focus intently on complying with our covenants. In the fourth quarter, we again complied with our debt covenants with ample cushion, and would have complied with these covenants even without the benefit of the equity offering we completed during the quarter. While we have and continue to use many tools at are disposal to minimize a chance of breaching our credit arrangements, it is likely that we will seek an amendment or waiver to certain of our covenants.

Slide five through seven have been included to illustrate the strength we have seen in client pursuit. Evidence, that despite the reduced level of transaction activity we are still winning sizable business. And in fact, as we would expect we continue to win more client pursuits globally than any firm in the business.

In addition, we have provided U.S. market statistics that many of you have expressed are helpful in looking at the fundamentals of the commercial real estate industry. I''ll not be devoting any specific comments to these slides today.

And now, I''ll turn the call over to Gil to cover the financial deck. Gil?

Gil Borok

Thank you, Brett. Please advance to slide eight. Revenue was $5.1 billion for the full year 2008. Net income, adjusting for one-time items was $208.7 million, which translates to $0.97 in adjusted earnings per share for the year. Normalized EBITDA came in at $601 million. The biggest contributors to the decline in adjusted net income and earnings per share were the 15% decline in revenue and resulting lower margins, driven predominantly by weaker sales activity on a global basis and softer leasing.

Also contributing to the sales and earnings decline was weakness in Global Investment Management, driven by the reduction in property values, which impacted the recognition of carried interest revenue and incentive fees. These collective declines were partially offset by strong growth in outsourcing revenue.

Please turn to slide nine. For the quarter, revenue was $1.3 billion, down $556 million or 30% from the year ago quarter. The decline in revenue was primarily due to the reason just discussed for the full year. We will provide another top level view on revenue by service line in a few more slides.

As a percentage of revenue, cost of services rose to 56.9% from 52.6% in the fourth quarter last year. This increase was primarily driven by a shift in the mix of revenues with outsourcing, including reimbursable growth, comprising a greater portion of the total and non-commissionable revenue from our Global Investment Management and Development Services segment comprising a lower portion of the total.

Operating expenses of $425.5 million were down 33% or $213.9 million versus the fourth quarter of last year. The reduction in operating expenses was driven by reduced incentive compensation expense, resulting from lower business performance and the benefit of cost reduction steps taken throughout the year. These reductions were partially offset by real estate asset impairment charges taken in the Development Services segment, integration and cost containment related expenses reflected here, but normalized lower on the slide.

The equity loss from unconsolidated subsidiaries in the current year was primarily attributable to the non-cash write-down of current investments in our Development Services and Global Investment Management segments, resulting from decreased market valuation.

In Q4 2008, we recorded minority interest income versus minority interest expense in Q4 last year, largely associated with our minority partner''s share of the write-down of real estate assets within our Development Services segment. Gains from disposition of real estate were only $4.9 million in the quarter due to more challenging market conditions.

After adjusting for one-time items, the resulting EBITDA for the quarter was $223.2 million, down 22% or $62.6 million from the prior year quarter, although the EBITDA margin was up 190 basis points at 17.4% versus the prior year quarter.

Please turn to slide 10. This slide reflects the company''s full year 2008 operating results. We have provided this information for your reference but we would not be devoting time to discuss this in our prepared remarks.

Please turn to slide 11. Total revenue in Q4 2008 decreased by 30% from the prior year fourth quarter. Our property & facilities management business delivered revenue of $451 million and was a large contributor at 35% of total revenue in the quarter with continued growth of 6% on a year-over-year basis.

Leasing also comprised 35% of total company revenue and was a close second behind property & facilities management. The decline of 28% year-over-year was reflective of the economic climate around the globe, causing a reduced need for space. Sales revenue on a combined basis was down 65% from the prior year quarter, continuing one of the steepest declines we have ever seen in the business, due to the state of the credit markets and de-leveraging occurring in the financial systems worldwide.

The appraisal and valuation business declined by 18% in the quarter and comprised 7% of total Q4 2008 revenue, driven mostly by declines in investment sales and the cost of funding financing that generates appraisals. Global Investment Management revenue was down 49% year-over-year. Development Services revenue was down 63%, attributable to slower sales volume and value for completed projects, consistent with weaker market conditions. The commercial mortgage brokerage business was down 52% year-over-year as the credit crunch continued to exact its toll on loan volume.

Please turn to slide 12. Here we have detailed results of our sales and leasing businesses in the Americas for the fourth quarter and full year of 2008. According to Real Capital Analytics, overall investment sales activity in Q4 2008, excluding privatization, totaled just $141 billion, a decrease of 64% compared with 2007. America’s sales revenue for the fourth quarter declined 62% year-over-year. For the full year, sales revenue was down 49%.

Revenue for CBRE''s Americas leasing business declined 26% in Q4 2008 as compared to the same quarter last year, and was down 11% for the full year.

Please turn to slide 13. Investment activity in EMEA declined in the final quarter of 2008. Total turnover in Europe fell to around 19.5 billion euros from around 27.5 billion euros in Q3 as investors were hesitant about committing to transactions. The difficulties in the European market negatively impacted our business, resulting in a 70% decline in sales revenue for the fourth quarter of 2008 versus the prior year quarter and a 47% decline in full year sales revenue from the 2007 level. CBRE''s revenue from leasing in EMEA declined 28% in the fourth quarter as compared to the same quarter in 2007. On a year-to-date basis leasing was down 8%.

Please turn to slide 14. CBRE''s sales revenue in the Asia Pacific region fell 64% in Q4 2008 as compared to the prior year quarter. For the full year 2008, sales revenue was down 40%. CBRE leasing revenue in Asia Pacific fell 38% in the fourth quarter as compared to prior year quarter. For the full year, leasing revenue was up 6%.

Please turn to slide 15. At December 31, 2008 in-process development totaled $5.6 billion, down approximately 14% from year ago levels. The pipeline at December 31, 2008 stood at $2.5 billion, down approximately 7% from year ago levels. The combined total of $8.1 billion of in-process and pipeline activity is down 12% from year ago levels of $9.2 billion.

Operating results for the fourth quarter and full year 2008 include one-time expenses in the amount of $3.1 million associated with our cost containment efforts as well as write-downs of impaired assets in the net amount of $49.2 million. Adjusting for these expenses results in a normalized EBITDA margin of 24.1% for the quarter and 14.9% for the full year.

Please turn to slide 16. Assets under management in Global Investment Management totaled $38.5 billion at year-end 2008. This total was up 2% from year-end 2007, but down 6% from the end of the third quarter. The fourth quarter decrease primarily reflected a drop in property values globally, as well as negative foreign currency impact.

For 2008, we completed acquisitions of $5.3 billion, primarily in North America, dispositions of $1.2 billion and took over portfolios valued at $2.4 billion in North America and Europe.

Our carried interest detail is shown on slide 17. In Q4 2008, we did not realize any carried interest revenue and we reversed $25.8 million of previously accrued carried interest compensation expense. As of December 31, 2008, the company still maintains accumulative remaining accrual of carried interest compensation expense of approximately $23 million, which pertains to anticipated future carried interest revenue.

Please turn to slide 18. This slide has been included to provide clarity as to the income statement line items and segments impacted by asset impairment charges already recorded during the fourth quarter and full year 2008. As indicated in the press release, the company is currently still in the process of completing its year-end assessment of goodwill and other non-amortized or intangible assets.

Given the uncertainty surrounding the global economy and the volatility of the company''s market capitalization during the fourth quarter of 2008, the company was required to perform such testing as of December 31, 2008, in addition to the normal test performed as of October 1, 2008. The company will have significant impairment charges to record, most likely in the Americas, EMEA and Development Services segment.

Given the complexity of this assessment, the final results are not yet completed, nor can a reasonable estimate be provided at this time. The company will complete this assessment and record a charge, prior to the filing of its 2008 Form 10-K. The impairment charge this quarter will be noncash in nature and will not affect liquidity, cash flows from operating activities or compliance with debt covenants.

Please turn to slide 19. We have maintained that when the market goes through down cycles we have the ability to significantly reduce operating expenses in our business in order to better align our cost base with lower activity levels. As it relates to our 190 million plan announced from the Q3 2008 call, we completed the elimination of 190 million of permanent run rate expenses.

I''ll remind you that in addition, variable incentive compensation expense was anticipated to come down approximately $250 million for the year at that time. We now know that this amount was approximately $350 million.

During the fourth quarter, we have identified an additional $195 million in run rate cost savings for 2009, offsetting any timing impact of certain cost savings actions not occurring at the start of 2009, or other savings of approximately $55 million that are temporary in nature in 2009.

All actions necessary to capture these new savings will be completed in the first part of 2009. In order to achieve these savings, we will incur an additional approximately $20 million in one-time charges this year in addition to the $27 million recorded in 2008.

Adding together about $190 million plus the additional $195 million plan announced today, we have reduced our overall operating expenses by approximately $385 million for 2009 as compared to 2007 to better position us to handle this down cycle in commercial real estate.

For 2009, we believe that the seasonal pattern of earnings will revert to levels seen pre-2005. What this means is that we will likely see breakeven earnings or a nominal loss in Q1 2009 with earnings improving to solid profitability of the remaining quarters over the year.

CapEx for 2008 came in at $40 million versus our planned 2008 expenditure of $80 million. We expect that CapEx for 2009 will be flat to down versus 2008.

Please turn to slide 20. Excluding the mortgage brokerage warehouse facility and the non-recourse development services real estate loan our total net debt at the end Q4 2008 was approximately $1.95 billion. This represents a 14% decrease from the third quarter of 2008 of $306 million facilitated by cash flow from operations and net cash proceeds from the equity raise. The revolver balance of $25.8 million at December 31, 2008 was reflective of foreign borrowings.

The Development Services business finances its project with third party financing sources. The substantial majority of these real estate loans are recourse to the development project but non recourse for the company.

As of December 31, 2008, the other debt category on our balance sheet included a non-recourse revolving credit line balance of $8 million related to the Development Services business. The outstanding balance of real estate loans was approximately $617 million, of which only $4 million was recoursed to the company.

On slide 21, we have illustrated our financial ratio covenant requirements and debt maturities schedule through 2010. Our next debt to EBITDA ratio at December 31, 2008 was 3.28 times as compared to 3.16 times at September 30, 2008. Our trailing twelve month interest coverage ratio was 4.72 times. Our weighted average cost of debt was approximately 4.4% at December 31, 2008 versus 5.6% at September 30, 2008. As you will notice, we were well within the financial covenant requirements under our present agreement.

Please turn to slide 22. Slide 22 depicts our normalized internal cash flow for 2008. To calculate this metric, we start with normalized net income and then adjust for the effects of depreciation, amortization and net capital expenditures. On this basis, our 2008 internal cash flow was $259 million. Due to our limited capital expenditure and working capital needs, our internal cash flow tends to be slightly higher than our net income.

I''ll now turn the call back over to Brett.

Brett White

Thank you, Gil. And please turn to slide 23. With the continued uncertainty in the commercial real estate business it remains unrealistic to provide future earnings guidance. We can however provide you some insight for how we think about our business and what we are planning for.

In investment sales, we expect the environment to remain weak, though I believe we may see modest improvement by year end. Leasing activity now appears to be in sync with the economy in general, and we would anticipate leasing to remain weak until such time as global economy show signs of stabilizing.

Outsourcing is a business we believe will continue to provide a great cushion in this difficult environment. Our expectation is that this business will approach $2 billion in annual run rate revenue in the not too distant future.

As would be expected in this environment we believe that our asset based businesses, Global Investment Management and Development Services will continue to face significant challenges in a short-term due to uncertain and dropping asset values. However, we believe these businesses are operationally sound and are well positioned for return to profitability when market conditions improve. Given these expectations, our strategy remains consistent. We will continue to aggressively manage expenses.

We noted that two other large U.S. based commercial real estate services firms, both negotiated covenant amendment with their lenders in 2008. While we did not have that need in 2008, in the near-term, we expect to pursue a similar strategy with our lenders to reinsure we are compliant with our relevant covenants.

We will continue efforts to gain additional market share through aggressive pursuit of new client mandates and we will remain prepared to continuously plan to react to market conditions, negative or positive.

We will pursue our strategy with what we believe is the industry''s strongest leadership team. Each of our senior most geographic and line of business leaders have more than 20 years experience in this business and all of us have managed through difficult downturns in the past. As was evident in the last few quarters, we know precisely which actions to take and which not to take, to properly position the firm to maintain the industry''s leading margins and profitability even in these very difficult times. At the same time, we have lots of experience in making sure that while these difficult decisions are being made on the cost side, we continue to service our clients at the high levels that they have come to expect and deserve, and that we remain positioned to capitalize on the many opportunities available to us in the marketplace today and to even further opportunities available to us when the market bottoms and begins to recover.

And with that operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you wish to ask a question, please press “*” and then “1” on your touchtone phone. You will hear a tone indicating that you’ve been placed in queue, and you may remove yourself from the queue at any time by pressing the “#” key. Once again, if you do have a question, please press “*1” at this time. And we''ll begin with a question from the line of Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone – JPMorgan

Thank you. Good morning. On the cost saving side, I was just trying to digest all of the numbers that you put out there. And maybe one way I was hoping you could help us with is as we look in to, at your operating, administrative and other expenses, where it seems like the vast majority of the cost savings are occurring, what do you think the first quarter might look like because if I take the 1.9 billion that you ran in 2007 and I think you mentioned taking about $385 million off of that number I believe, it would seem like the quarterly run rate would go down to something like in the high 300s, is that right?

Brett White

I''ll let Gil answer that question. Go ahead, Gil.

Gil Borok

Okay. I think the best thing you can do because we haven''t phased it or finalized the phasing, the best thing you can do is take it ratably the way it would have perhaps flowed in ''07 or even earlier, we made a comment that next year will look kind of like pre-2005. So, if you look at that phasing and try to model that way at this point, that''s the best way to phase in the 385.

Anthony Paolone – JPMorgan

And when you say, pre-2005, I''m just not really clear as to -- do you mean in terms of the way the quarters lay out?

Gil Borok

Yes, correct.

Anthony Paolone – JPMorgan

Okay. Okay, so, I will look at those then. Another question on your debt maturities, I think it''s about 50 somewhat million a quarter in ''09, a little bit more in 2010. Can you comment on how you intend to fund those, whether you have enough free cash flow to do that?

Gil Borok

Sure. The combination of cash flow from operations and to the extent necessary if we have to borrow under the revolver to do so in the early part of the year, we''ve got the capacity to do that.

Anthony Paolone – JPMorgan

Okay. And also related to the debt. Could you comment on maybe the other sort of comparable amendments, you have seen occur out there like what that''s meant to either rate or costs to make those amendments and so forth?

Brett White

Anthony, it''s Brett. I don''t think that''s a relevant question at the moment. Let me explain why. The amendment market is very active and it''s very fluid. And while in a normal market environment, we''d be able to point towards and really guide you towards four or five amendments that look a lot like what we might be seeking in this marketplace is just simply not possible. It''s frustrating that it isn''t as much for us probably as it is for you. But each company is being looked at I think very uniquely and those companies are being looked at in terms of their strength of revenues and what type of platform they have and so forth.

So, while we have a fairly good sense of where we think all this will end up for us, I can''t point towards a comparable for you and I am sorry that I can''t. And, on the amendment I think that''s really all that we want to say at this point. As soon as -- and if we get into those discussions, conclude those discussions with lenders, of course you''ll get a full disclosure on exactly what that amendment looked like.

Anthony Paolone – JPMorgan

Okay. And then Brett last question. In terms of thinking about your business over the next several quarters, given the way the downturn is unfolding. Do you think it''ll demonstrate the same seasonal characteristics as it has historically or do you think they will start to look at some of the businesses sequentially or just different way.

Brett White

It''s a great question, and it''s something that we''ve been spending considerable amount of time on really for the past year. And what Gil was alluding to earlier and let me add a little clarification to that, is that we''ve been talking now for a few quarters about, by the way, I still have lots of folks in this industry, about the idea that the industry seems to have, particularly on the capital market side, seems to have reverted back to levels of activity and I feel much like 2003, that timeframe.

And if you go back to that period of time and you look at our company, what you would have found is that seasonally and it''s related a lot to the contribution of revenues by line of business and by geography which had different cost structures. What you would find is that typically pre-2004 and going back to a number of years, we would post a modest loss or breakeven performance in the first quarter and then we would show increase in profitability Qs 2, 3 and 4 with a fairly heavy contribution of the total profitability in late Q3 and Q4. You saw that in 2008, you saw a different seasonality last year than we had seen in 2007 and 2006, and again it was a movement toward weighting of profitability later in the year. That is really based primarily on the cost structures of the businesses providing the profits and we would expect that in 2009, as Gil referenced earlier, that''s the type of seasonality that you are likely to see. And again I don''t want to walk through the percentages of revenue and EBITDA, we saw back then, but you have those numbers. And I would just say if you go back to that period of time and look at the percentage contributions of total firm revenue, total firm EBITDA, I suspect it''s probably going to be indicative of what we are going to see in ''09.

Anthony Paolone – JPMorgan

Okay. Thank you.

Brett White

Yes.

Operator

Next, we’ll go to the line of Jay Habermann representing Goldman Sachs. Please go ahead.

Jay Habermann - Goldman Sachs & Co.

Hey Brett, here with Sloan as well. I know you are reluctant to provide an outlook for 2009 but I thought we''d just try to sort of look at Q4 and then sort of look at the run rate as that would indicate for the full year but if you look at sales, the drop-off obviously in the fourth quarter and then you forecast out to 2009 as well as the recent deterioration in leasing, it was only down 9% for the full year. We''re just trying to get a sense of full year EBITDA and I mean is it unrealistic to think that it could be down as much as 25%. I mean those two areas alone account for 50% of your total revenues.

Brett White

Well, Jay the challenge here is and I said this last quarter and the quarter before is trying to forecast in this environment is a fool’s errand and it''s a fool’s errand because it is frankly impossible to forecast when the credit markets are going to return to any sort of state of normalcy. When they do, what we know we are going to see is a pretty significant pick up in capital market transactions and revenues. And it is also very, very difficult at the moment to try and forecast what impact the current economic malaise is going to have on the global leasing business.

There is -- what we saw in the fourth quarter was that in late October, November and December we''ve saw really every dynamic that supports any business go south and it doesn''t matter what industry you are in, everything looks pretty bleak, middle and late fourth quarter. So one model you could build to say all right, the environment for 2009 will simply extrapolate out and replicate what we saw in the fourth quarter. That to me would be a downside model. In other words, you are saying that all the bad things that happened in Q4, those impacts they have had on the market in our business remain in place for the year and there is no improvement in any of the businesses, although we saw in Q4 in ''09. That''s probably a good place to build your downside model.

Is that a realistic model for ''09? Hard to say. As we sit here right now and we are 19, 20 months into the capital market’s dislocation which is now almost three times longer than any capital market’s dislocation we have been through, it''s hard to imagine that sitting here a year from now, we are still going to be facing an environment where there is no credit available in the industry, but it''s possible.

We saw a dramatic fall off in our leasing business as we been predicting for a year. We saw that fall off in late fourth quarter and as we said at the end of the third quarter call, we expected then and we expect now that leasing globally is going to be under pressure for a while. But trying to predict what this year is going to look like and what EBITDA performance is going to be is just not possible. Could EBITDA be down 25% from where we ended up in 2008, hard to say. It seems that would certainly set to me the low end of an expectation range and I would hope that we could do better than that.

But, again everyday brings a new challenge. Everyday brings new news in the marketplace and I don''t think that we hear anyone really on the management team, if anyone, any firm in this industry can with any confidence predict what 2009 is going to -- how it’s going to play out and what is it going to look like.

Jay Habermann - Goldman Sachs & Co.

And I guess and certainly those comments are very fair and as you -- two follow ones, one would be cost savings, the other I guess just further de-levering. You guys issued equity in the most recent quarter but would you accelerate both of those in terms of dealing with the challenges that lie ahead?

Brett White

That I can give you definitive answer on and the answer on cost savings is absolutely we have --

Jay Habermann - Goldman Sachs & Co.

So beyond the 385?

Brett White

Sure. Think what we’ve got so far, we''ve talked about $385 million in run-rate OpEx productions. Something a bit below double that in incentive and variable productions. I mean this company has reduced total expense from 2007 by almost a billion dollars. And we are -- the one thing I think you can take away from our results in the fourth quarter is there is nobody that is going to get ahead of us on cost reduction. We are intensely focused on right sizing our cost structure to match the marketplace.

And, so while I can''t for a moment predict what the revenue line is going to look like in 2009, I can tell you that should the revenues for 2009 come in below our internal expectations at the moment than our work on cost will accelerate. And, we are -- the cost reductions we''re going through at the moment are dynamic. They don''t have a start point and an end point. We will continue to reduce costs until we see recovery in this marketplace. And we are -- that is the one lever that we can truly control. And, so we intend to exercise that lever very, very aggressively.

Jay Habermann - Goldman Sachs & Co.

And then on the de-leveraging, is that something else you might seek to accelerate in this cycle. I guess you really have an economic risk after that?

Brett White

De-leveraging in a sense that -- let me answer the question this way. If you want to know what our uses of free cash flow are going to be in 2009, certainly the majority of the usage of free cash flow will be to -- will be used for de-leveraging. So that''s how I''d answer that question.

Jay Habermann - Goldman Sachs & Co.

And just lastly, can you comment a bit on the write-downs and specifically the development in the Investment Management. It''s my understanding, obviously you are not putting a lot of your own capital in here so; number one, can you explain those impairments. And number two, does your development model eventually shift to where you just become more fee based?

Brett White

I will let Gil talk about the write-downs specifically but remember that in both Investment Management and in Development we -- although we are a very small and minority investor in those funds, we do co-invest in those funds and those impairments we took are write downs of those equity investments. But Gil, do you want to comment anything on that?

Gil Borok

Yes sure. Following on what Brett said, if you go to slide 18 it details it out. Any write-down that you see in the equity loss from unconsolidated subsidiaries line would be a write-down of a current investment, either in the Development business, the Investment Management business or the Realty Finance Mortgage REITs that we were in.

Any of the write-downs that you see in operating, administrative and other are in the Development Services segment, those are four consolidated projects. But you are right; we don''t have a 100% economic exposure there. We have a 10% economic exposure. Business model is a little different so we consolidate those projects and accordingly the write-down is in operating expense but with a significant offset that you see also on the slide in minority interest income which is reflective of the minority partnership of the write-down.

Brett White

I would just say that to add some color to that, our view is that we should and are taking a very aggressive posture, in terms of how we look at these businesses, how we value these businesses and therefore, what results from that is whatever write-down needs to be taken, will be taken.

So, our goal is to -- has been to take a very, very conservative look at these two businesses, investment management and development, to take these write-downs now. And these write-downs are based on a view of asset valuations that I''m hopeful in the rear-view mirror, we''ll end up being trough valuation. Certainly the value declines we saw in the fourth quarter were unprecedented and resulted in these write-downs. But as we''ve a mentioned on the call, they''re noncash, they don''t affect covenant EBITDA and they''re not impacting cash flow from operations. But they are impairments that we think are prudent to take with a very conservative look around these businesses.

In terms of what the development business -- what this means for development business, it''s a bit of a two-edged sword. Development is a terrific business when times are good and we have a very conservative capitalization structure in that business, that our management team in development has spent really the last four, five years, building a business that makes – certainly as they can that the parent firm has as little risk as possible around that business. But make no mistake about it, in times such as these where you are seeing asset devaluation as much as 50% in some asset classes that business is going to feel that pain and they are. Now, looking forward in that business, the near-term prospects are tough. They are reducing operating expense at a greater percentage of total OpEx than any business we have and their objective is to get that business profitable as soon as possible.

The other side of the sword or the good news is that certainly, and the same holds true for Investment Management, with the devaluations we''ve seen across the asset class, as you look into late 2009 and 2010 there ought to be opportunities in the marketplace that we may not get a chance to look at again for many years. So, our goal for that business is to have it positioned properly, to turn a profit, and then be ready when opportunities rise and credit markets return to take advantage of what should be some pretty attractive opportunities in the marketplace.

Jay Habermann - Goldman Sachs & Co.

Okay. Thank you.

Brett White

Yes.

Operator

Next, we''ll go to the question of Brandon Dobell with William Blair. Please go ahead.

Brandon Dobell - William Blair & Company

I wonder if I can focus on the outsourcing business for a second to maybe compare and contrast -- it looks to be kind of mid single-digit growth in the fourth quarter with your expectation for probably low double-digit growth in 2009. How are you comfortable that the slowdown in the fourth quarter isn’t indicative of some greater trend in this business?

Gil Borok

Well, it''s a good question and it''s -- just like any other business we have, it''s extremely difficult right now to predict what the future holds for any of our businesses. I think the best answer I can give you is to talk generally about what it is that causes growth in the outsourcing business and what causes growth in that business is large corporations and institutional owners are looking to become more efficient. And they become more efficient, one of the ways they do that, a lever they pull is to outsource non-core activities to third-party providers, such as ourselves or a couple of our global competitors.

It isn''t surprising to us that in 2008, we saw an increase in the velocity of contracts going out to market in this business; it also isn''t surprising that we saw that velocity come down a bit in the fourth quarter. I think that what you would expect to see in this business is when large corporations and institutions come to the conclusion that tough days lie ahead they move pretty quick on putting these contracts out and make some decisions around outsourcing and then you revert back to a more, what I would describe as more mean rate or normalized rate of growth. I think the fourth quarter is much more indicative of what one should expect out of this business.

We saw in 2008, we saw one of our largest clients go out of business. That was WaMu and the loss of that client while not material to the overall firm''s results certainly were and are material to our outsourcing business and that is offset by new clients that we''re on-boarding. But if you look at 2009 and 2010 what I would expect to see in that business is, a business that has favorable dynamics in the marketplace, and ought to be able to grow at a decent rate. And as we mentioned in our comments, we think that business is going to be an ever larger percentage of the overall revenue and profit pie of the firm. You saw that in 2008, and I think the real good news about outsourcing for our business is CB Richard Ellis now is a firm who has a contract based very sticky revenue line that''s become a majority contributor of our overall business.

Brandon Dobell - William Blair & Company

As you looked at the last part of ''09, or the early indications of -- last part of ''08, early indications of ''09, just give the overall macroenvironment, how the pricing discussions have been in that business, especially on renewals for you guys?

Brett White

They''re brutal. One thing you can count on from our outsourcing customers is, price does matter and I''d love to tell you that with the platform we have which is the dominant platform in the outsourcing industry and very few competitors we have in that business that price is moving up at a rapid rate, it isn''t?

Our outsourcing clients are very, very large corporations and institutions. They go through rigorous RFP processes and they grind price very, very hard. In 2009, I expect we''re going to see continued pressure on pricing in that business and one of the aspects of that business which we accept as a partner with our large clients is that we would work with them as they struggle. And we are a firm that does business with most of the major corporations around the world. There''s not one of them that isn’t extremely worried about their own business right now. And certainly, we''re feeling that come through on renewals and on new bids. But having that said, these outsourcing contracts remain quite profitable for us. They''re very, very important to our overall business model, and remember that when we track outsourcing through our publicly reported segments and our P&L, we do not credit the outsourcing line with many of the high margin activities we sell through to those clients, specifically the transaction activities. Those are picked up by activity in the business line where they occur. So, with almost every one of our large outsourcing contracts we are performing a number of high margin activities that were picked up in other lines of business and those are quite attractive to us, regardless of the contract fee on the outsourcing contract specifically.

Brandon Dobell - William Blair & Company

Okay. Then final question, maybe just more of a what is the question, I asked this once but the implication of going back to the banks and renegotiating or negotiating an amendment or a waiver or something like that, to a certain extent could imply that you ought to be more concerned about the trajectory of the business than the fourth quarter performance may have alluded to.

Or is it just -- you just want to make sure you''ve got a half a turn or three quarters of a turn of cushion, just in case you are going to prepare for that worst case scenario. I''m trying to figure out how committed you are to going back and renegotiating, and I guess maybe tell us something about where we should place our expectations around the sales and leasing revenues right now?

Brett White

Sure. I understand your question and I will just say that, I wouldn''t -- when you think about whether or not to discuss with your lenders an amendment to your credit agreement, you consider lots of different factors.

And the first point I want to make is, and we made it on the call, is that please do keep in mind that at the moment, we are the only major U.S. public commercial real estate services firm that hasn''t received an amendment. But we are fairly proud of that.

We got through 2008. We had terrific cushion in the third quarter and we had a very ample cushion in the fourth quarter, even without the equity raise. But all that having been said, what we talked about in the third quarter call is we need to manage this business against expectations that are extremely conservative. And Jay asked the question earlier about what might performance look like in 2009? And the answer I gave Jay -- I am sorry it’s the only answer I can give is we don''t know. And not knowing what 2009 might look like and at the same time being very cognizant and aware that transaction velocities in capital markets continued to decline in the fourth quarter and that leasing velocities, overdue but finally did decline in the fourth quarter. We need to build against those data points, a set of models that run the gamut from a worst case model that would imply all those things continue with no abatement through 2009 all the way through an optimistic model that we see some recovery in the credit markets and that things get better sometime this year.

When you then overlay that to how you think about an amendment with your creditors, we told you that we will only manage against the worst case model, because anything other than that we think is imprudent. So when we talk about today, that we will likely seek an amendment with our creditors, it''s against the backdrop of prudence and conservatism more than anything else.

And again, I would just underscore that we talked about this in the third quarter, we ended up not having to do it but I do think as we look at 2009 and we sit here today, the worst case model in our projection would certainly indicate that we would want to get that done. The more optimistic in base case models might not, but we are going to manage against that more conservative view.

Brandon Dobell - William Blair & Company

Okay. Fair enough. Thanks, Brett.

Operator

And our next question comes from the line of Vance Edelson from Morgan Stanley. Please go ahead.

Vance Edelson – Morgan Stanley

Hi, thanks. Just back on the amendments or waiver to the covenants, just one more question there. Granted, you can''t provide details as to what exact shape that might take, but in terms of timing do you have a sense there, have there been preliminary discussions and is this something you hope to accomplish in the immediate future?

Brett White

We have, as we talked at the end of the third quarter, we have done lots of work in terms of trying to understand what the marketplace is for amendments at the moment. One of the -- I suppose, and I mentioned this earlier, it was a different caller, one of the dynamics out is there are so many companies seeking amendments right now that it''s difficult to really model out exactly what an amendment for this firm might look like, what its cost might be, what form it might take it and all that is a discussion we will have with our good partners in the lending community.

At the moment, what we said on the call is, it’s likely that we will seek an amendment and I think I will just leave it at that. Timing really is subject to a lot of different factors that probably aren''t worth going to in the call today. In terms of whether we''ve had discussions with lenders, no, we haven''t any real substantive discussions with lenders. We have talked to our lead agent quite a bit. And as I mentioned here in the third quarter we had done that.

So I think we have a pretty good sense what that market looks like. We have a pretty good sense of what the process is. We watched as I mentioned, two of our competitors get this done. Late last year, we saw what that pricing looked like, that was helpful. And I am quite confident that when we enter into those discussions, assuming we do there will be a very good outcome for CB Richard Ellis.

Vance Edelson – Morgan Stanley

Okay. Thanks for that. And on the goal to aggressively manage costs, I''m just wondering what additional opportunities exist beyond variable comp coming down. It seems that most of the cutting out of the fat would have taken -- would have been taking care of by now. So, could you just give us a feel for what areas are still left to attack, either by division or geography or both? Thanks.

Brett White

I don''t want to go through division, geography and I don''t want to go through line items of expense. But I would answer your question this way which is, in an environment where you are reducing cost, in the manner we''re reducing cost, you go through a very simple process around where to make the reductions and how deep to make them, it is a cost benefit analysis.

We are reducing costs across the company in every business line and in every geography. And you''re right, there were easy costs. Many of those have been eliminated. The costs that we have been focusing on lately are not easy. They are much harder decisions to make; they impact different groups of people than the costs that we cut out mid-2008 did.

However, there are opportunities to reduce cost in this company in a number of places that we could still approach but they will come at a cost to the firm. And that cost is future growth, that cost is opportunities that we would like to service and perhaps we could pursue, that we could now not pursue. But we''re very careful to make sure that we balance this cost reduction efforts in a way that we can, first and foremost aggressively service all the clients we have and that is something we will absolutely do. We are not reducing cost in any areas that a client is going to see or feel.

Second, we''d like to not reduce costs in areas where we believe there are opportunities for real and significant growth in the near-term and we are not hitting those areas. Where we are hitting cost are areas of the firm where cost tends to build up over years of very good times and it''s appropriate and prudent to take those cost out when the business volume is what it is now.

The way we think about it is, the company will produce a certain level of revenues in 2009 and there is an appropriate cost structure that fits against those revenues and our goal is simply to manage to that cost structure and there is probably a bit more we can do there in 2009. For what we expect for 2009 revenues we will see. If revenues come in better than we expect, the cost reduction efforts are probably done. If they come in worse than we expect as I mentioned earlier, we will be right back at it.

Vance Edelson – Morgan Stanley

Okay, I''ll leave it there. Thanks.

Operator

And, our final question today comes from line of Anthony Paolone with JPMorgan. Please go ahead

Anthony Paolone – JPMorgan

Thank you. I just had a couple follow-ups. I think Gil, you mentioned, there is $23 million left in accruals for carried interest. I think comp expense maybe and I was wondering if you anticipate reversing those at some point or what might trigger that?

Gil Borok

It''s all based on valuations in the various funds that we have in the Investment Management business. So you saw a reversal in the fourth quarter of about $25 million and that was based on fourth quarter valuations. And obviously there were certain clients where the valuations came in and supported the carried interest balance. So, we maintained that on the books. But it is subject to change either way depending on internal valuations and external valuations that we do routinely.

Anthony Paolone – JPMorgan

Is that -- are those once a year type valuations or is this just ongoing?

Gil Borok

We generally look at them internally on a quarterly basis and then we value them externally once a year.

Anthony Paolone – JPMorgan

Okay. And then last question on -- in Development Services it seems like the run rate there has been give or take $30 million a quarter, if not much is started, if you don''t see much in terms of new construction in commercial real estate for a period of time, where is that trend, how long does it take until those deals burn-off.

Brett White

Can you clarify the $30 million, what you are referring to?

Anthony Paolone – JPMorgan

I think those are your rough quarterly revenue run rate in Development Services.

Brett White

Right. I think the way to think about development is that that business earns its revenues in a couple of different ways. There is a bucket of revenues that comes from the management and oversight of the development of projects, and there is a bucket of revenues that come from that point in time when those projects are disposed. And, what you saw in 2008, I would expect you would see certainly in the near-term, 2009, don''t know about full year is that dispositions ground to an almost total halt and so that bucket of revenues didn''t exist in late 2008. By the way same thing holds true in the investment management business. However, the revenues that development company earned from management of its projects remain and they have a very robust pipeline of projects underway.

So I don''t want to predict or talk today about what we think our run rate revenues in that business will be but I will tell you that those are the two buckets of revenues that they have and one bucket is certainly under stress right now. That''s the disposition bucket. But the other bucket of management of projects and development of projects continues.

Anthony Paolone – JPMorgan

Okay. But it''s not as if the stuff that continues and that is being managed if you don''t generate new construction, there is not a lot of new construction, those burn-off say in two years as projects are completed or something like that?

Brett White

Sure, yeah. Sure.

Anthony Paolone – JPMorgan

Okay. Thank you.

Brett White

Yes.

Operator

Do you have any concluding remarks?

Brett White

That''s it. Thanks everyone for your time and we will talk to you next quarter.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.