CBRE Group, Inc. (CBRE) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to CBRE Q2 Earnings Conference Call. [Operator Instructions] Also, as a reminder, this teleconference is being recorded. And at this time, I will turn the conference over to your host, Mr. Nick Kormeluk. Please go ahead, sir.

Thank you, and welcome to CBRE's Second Quarter 2013 Earnings Conference Call. About an hour ago, we issued a press release announcing our Q2 financial results. This release is available on the homepage of our website at www.cbre.com. This conference call is being webcast and is available on the Investor Relations section of our website. Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archive audio of the webcast and a PDF version of the slide presentation will be posted on the website later today, and a transcript of our call will be posted tomorrow. Please turn to the slide labeled forward-looking statements. This presentation contains statement 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 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 statements that you may hear today. Please refer to our second quarter earnings report filed on Form 8-K, our current annual report on Form 10-K and our current quarterly report on Form 10-Q, in particular, any discussion of risk factors or forward-looking statements which are filed with the SEC and available at the SEC's website, www.sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today. We may make certain statements during the course of this presentation, which include references to non-GAAP financial measures as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures, which are attached hereto within the appendix. Please turn to Slide 3. Participating with me today are Bob Sulentic, our President and Chief Executive Officer; Gil Borok, our Chief Financial Officer; and Cal Frese, Americas Chief Executive Officer. I'll now turn the call over to Bob.

Thank you, Nick. And please turn to Slide 4. CBRE achieved another quarter of solid growth in the second quarter of 2013. Our performance was especially noteworthy coming against the backdrop of continued weak global economic growth as well as heightened financial market volatility and rising U.S. interest rates following Fed Chairman Bernanke's remarks about the quantitative easing program in late May. Our improved performance amid this macro environment is a testament to our well-balanced service offering and our people's energy and creativity in collaborating across markets and disciplines to produce outstanding results for our clients. Nothing is more important to our company. Overall, revenue growth of 9% was fueled by meaningful improvement in all 3 global regions. We also saw a continued strength in our capital markets and occupier outsourcing businesses. Asia Pacific led the global regions with 16% revenue growth, extending its healthy rebound from a relatively soft first half in 2012. It was particularly gratifying to see a very strong growth in Greater China for the second consecutive quarter. The Americas region achieved 10% revenue growth for the second quarter in a row. Cal Frese, CEO of our Americas business, will take you through these results later. More importantly, he will discuss our strategy for sustaining growth and improving market share through our focus on better serving clients. EMEA also continued to recover from a difficult 2012. Although higher revenue in France and the United Kingdom was tempered by the recessionary environment across most of Continental Europe, overall revenue in the region rose 9%. Turning to our global service lines. The capital markets-based businesses continued to be growth engines for us. Global property sales revenue rose 20% and was driven by Asia Pacific and the Americas. Commercial Mortgage Brokerage revenue improved 22% as investor appetite for debt financing remained strong throughout the quarter despite the long-term interest rates spike later in the period. Appraisal & Valuation revenue, which is closely tied to investment activity, improved 10% led by Asia Pacific. Real estate outsourcing continues to be a growth catalyst as well. Overall, property, facilities and project management revenue rose 11% globally with notable strength in EMEA. Our Global Corporate Services or GCS business, which is our occupier outsourcing service lines saw revenues rise 11% globally. GCS revenue generally includes commissions from sales and lease transactions associated with GCS accounts in addition to facilities and project management fees. A high degree of occupier caution amid weak global economic growth continued to restrain global leasing performance. Despite generally soft market conditions, however, global leasing revenue rose 4% paced by the Americas. Achieving more robust growth in leasing -- in our leasing business despite the lackluster macro microenvironment is one of CBRE's strategic priorities. As planned, last month we paid down all $450 million of our 11.625% senior subordinated notes due in 2017. This was the final step in our recent refinancing actions that have materially lower our annualized interest expense while nearly doubling our borrowing capacity. These actions have markedly strengthened our financial position and have given us increased flexibility to execute our growth strategy. Now, I'll turn the call over to Gil who will review the quarter's financial results and discuss the refinancing actions in more detail.

Thank you, Bob. Please advance to Slide 5. Total revenue was approximately $1.75 billion for the second quarter of 2013, up 9% from last year. This increase is at the upper end of our expectations for long-term growth and was generally well balanced among service lines with good growth around the world. Cost of services increased to 58.5% of total revenue in the second quarter of 2013 versus 56.7% in the second quarter of 2012. This increase was driven by declining transaction revenue in a few geographies that have a largely fixed cost structure and lower revenue in our principal businesses where all costs are classified as operating expense. Largely, because of this, cost of services did not decline commensurate with revenue. Second quarter 2013 operating expenses were 28.7% of total revenue, down from 30.1% in the second quarter of 2012. It should be noted that $9.1 million of integration and other costs related to the ING REIM acquisition were included in the second quarter of 2012 while there were no such costs in the second quarter of 2013. Excluding integration costs, operating expenses were 29.6% of revenue in the second quarter of 2012. The current year decrease was achieved despite incremental investments in our operating platform. Interest expense was down 15% versus the second quarter of 2012, reflecting the effects of our refinancing activities this year. In the second quarter of 2013, we normalized costs totaling $42.7 million associated with the early redemption of our $450 million 11.625% senior subordinated notes. Our second quarter 2013 tax rate was approximately 40%, consistent with the second quarter of 2012. The tax rate this quarter was elevated due to a shift in earnings to higher tax jurisdictions and losses in certain countries in Europe where no tax benefit could be provided. However, as we have previously noted, we have been focused on the tax efficiency of our legal entity and operating structure. Given this and the normal seasonality of our transaction revenue, we expect the full year 2013 tax rate to approximate 35%. Depreciation and amortization expense rose by approximately $5 million to $43.6 million, driven by increased technology-related capital expenditures and mortgage servicing rights. Adjusted diluted earnings per share rose 15% to $0.31 in the second quarter of 2013 from $0.27 in the second quarter of 2012. However, costs associated with the early redemption of the 11.625% notes reduced GAAP earnings per share by $0.08. As a result, second quarter 2013 GAAP diluted earnings per share was $0.21 compared with $0.23 in last year's second quarter. Normalized EBITDA rose 10% to $243.1 million in the second quarter of 2013, resulting in a normalized EBITDA margin of 13.9%, a slight improvement from 13.8% in the second quarter of 2012. Please turn to Slide 6. Property, facilities and project management revenue increased 11% for the quarter. It was once again our largest service line, representing 35% of total revenue. Leasing was our second largest service line, comprising 28% of total revenue for the quarter. Overall, leasing growth was moderate at 4%, reflecting continued occupier caution in many parts of the world. However, in light of the macro environment, we were pleased to see leasing revenue improve in local currencies in all 3 global regions. Property sales grew by 20% in the second quarter of 2013 paced by Asia Pacific and the Americas. This reflects healthy growth at a time when investment markets in much of the world remain challenged. Global Investment Management revenue decreased 1% versus the prior year period. We will discuss these results in detail later. Appraisal & Valuation revenue increased 10% for the quarter. While growth was achieved in all 3 global regions, it was especially strong in Asia Pacific. Commercial Mortgage Brokerage revenue grew 22% year-over-year. U.S. loan origination activity was robust through the quarter notwithstanding the long-term interest rate rise late in the period. Development Services revenue decreased 19% to $12.6 million, attributable to lower rental income resulting from property dispositions. Recurring revenue comprised approximately 61% of total revenue for the same quarter of 2013. This included leasing commissions from existing clients, property and facilities management fees, asset management fees and loan servicing fees, which are all largely recurring. Please turn to Slide 7, which shows the continued steady forward vacancy rates and ongoing positive absorption, trends that CBRE economists expect to continue over the next 24 months. Average national cap rates remained relatively stable in the second quarter of 2013 versus both the second quarter of 2012 and the first quarter of 2013. Year-over-year volumes improved in all 3 property sectors, most notably in office. I'll now hand the call over to Cal who will address our Americas performance and strategy.

Thanks, Gil. Please turn to Slide 8. We achieved solid growth across the Americas in the second quarter of 2013. Overall revenue growth of 10% was particularly notable considering the moderately improving economic conditions that continued to prevail in the heightened financial market volatility that developed over the final month of the quarter. Property sales continued to be a strong growth engine for the region. Sales revenues increased 19% in the second quarter of 2013 as investor demand was generally strong throughout the quarter and has remained so despite the recent run-up in long-term interest rates. While the recent widening of CMBS spreads could temper liquidity in some secondary markets, core properties remain in high demand and capital flows into real estate remain strong as investors continue to search for yield. Leasing revenue rose by 5% during the quarter. This performance comes against a backdrop of mixed local market conditions with modest overall improvement in employment, availability and rental rates. We believe that we could continue to gain market share in the face of generally soft overall market activity. Continued steady growth of our occupier outsourcing business drove an increase in property, facilities and project management revenue of 9% during the quarter. Please turn to Slide 9. Our results in the second quarter underscore the well-balanced service offering we have assembled in the Americas as the business has evolved over the past 6 years. As you can see, property sales and leasing comprised almost 3 quarters of our revenue in 2006. Today, they are business mainstays with short -- with strong near- and long-term growth prospects. But as a result of the dramatic growth of the GCS business, sales and leasing now make up 48% of total revenue. The dark green slice you see here primarily reflects revenue from facilities and project management services. It does not include transaction commissions associated with our GCS accounts, which are reflected in sales and leasing revenue. On this basis alone, GCS now accounts for 28% of Americas revenue. Please turn to Slide 10. The GCS business continues to benefit from excellent underlying momentum. As Bob mentioned, GCS achieved revenue growth of approximately 11% in the Americas during the second quarter of 2013. We have developed a robust occupier outsourcing business over many years as this trend has grown. Although some major companies have been outsourcing real estate services for many years, adoption remains in its early stages for much of corporate America and has only just begun in such sectors as health care and government. The pressures to reduce costs and improve efficiencies in these sectors should drive increased opportunities for some time. We believe occupier outsourcing has the potential to be a more than $50 billion global market with, at best, a 20% current penetration rate. CBRE is ideally positioned to capitalize on the considerable upside potential in this market. Reflecting this, GCS signed 55 total contracts on a global basis in the second quarter of 2013. Of these, the majority had an Americas component. Our Americas GCS business signed up many new clients during the second quarter, including J.C. Penney, Booz Allen Hamilton and the state of New York and expanded our services for such clients as Dell and AT&T. Now, please turn to Slide 11. Our asset services business contribute significantly to properties, facilities and project management revenue. This business generally grows more modestly than GCS. However, we have amassed by far the largest third-party property management portfolio in the industry, which gives our clients a distinct advantage in terms of our breadth of expertise and ability to achieve economies of scale. Asset services is strategically important as it enables us to provide property owners with an integrated leasing and management service offering across a broad portfolio. We are particularly focused on urban high rise and trophy assets through our Premier Properties initiatives. We added 16 such properties in the first 6 months of this year and now service a portfolio of more than 200 of these large landmark properties. We are also concentrating on growing our relationships with strategic institutional property owners, some of which you see represented here. Please turn to Slide 12. Leasing services on behalf of property occupiers and owners has been a core offering for CBRE for more than 100 years. In the Americas, we have more than 2,400 specialized professionals providing this service. Included among the occupiers they serve are clients of our GCS business. A year ago, we made the decision to increase our investment in the leasing business, launching a number of initiatives including an expansion of our managed brokerage strategy and mid-market initiative. We are highly focused on growing our revenue and market share. Jack Durburg, our Global President of Transaction Services, described our systematic approach to agency and occupier pursuits in detail last quarter. CBRE. Is renowned for large complex transactions such as the ones you see identified here. We take a highly strategic, consultative approach to every assignment. This goes far beyond finding space and negotiating lease terms. These activities are preceded by sophisticated client advisory work that requires thorough knowledge of market activity and trends, complex financial and qualitative analysis of space alternatives and insightful strategies to engage the marketplace. Such broad-ranging expertise is typically beyond the scope of any one individual. Therefore, in nearly all cases, our service is delivered through collaboration among our professionals who have access to a depth of resources and organizational support that many competitors have difficulty replicating. Our go-to-market strategy and reputation for quality services continue to catalyze future growth. Now, on to Slide 13. The same sophisticated approach underpins our work in the real estate investment market. Much like the leasing market, our 650 investment sales and mortgage brokerage professionals are organized around property type expertise, and teamwork is emphasized to ensure success in both strategic advice and execution. The results of our efforts are clear. Real Capital Analytics has identified CBRE as the #1 U.S. investment firm for the past 7 consecutive years. Based on RCA data for the first half of 2013, we are once again the leading firm with market share of 16.9%, an increase of 110 basis points from the same period in 2012. In addition, Real Estate Alert ranked us #1 at mid-year for office property sales valued at $25 million or higher. As this track record demonstrates, we are highly active at all price points within the market, executing transactions valued between a few million and a few billion dollars. Our Commercial Mortgage Brokerage business consists of large origination activity to facilitate asset acquisitions or refinancings and loan sales for lenders who want to remove these assets from their balance sheets. We also have a sizable loan servicing portfolio of more than $100 billion. Our overall loan activity has been strong this year with volume rising from 27% to $11.6 billion at mid-year. We do business across all property types and have deep relationships with banks, life companies, conduits, private equity firms and government agencies, all of whom increased their commercial mortgage portfolios this year. Increasingly, what sets CBRE apart is our ability to deliver sophisticated, integrated capital market solutions for buyers and sellers of real estate. A good example of this is the sale of One Wells Fargo Center in Charlotte where we arranged both the sale and financing of the property. Few firms can match CBRE's strength in real estate capital markets. As a result, we believe we are poised for further market share gains and revenue growth in this business. Now, I'll turn the call back to Gil who will continue to review our second quarter performance.

Thanks, Cal. Please turn to Slide 14. EMEA overall revenue growth was 9% in the second quarter of 2013. This is very solid growth considering the recessionary macro environment across most of Europe. France and the U.K. were the primary drivers of this revenue increase. Property sales revenue was flat for the quarter, following exceptionally strong growth in the first quarter. Our performance was split during the quarter. In the U.K., CBRE was the most active firm in the investment market in the second quarter, according to property data, which led to double-digit revenue growth. However, our activity was lower in much of Continental Europe with the exception of Belgium, Spain and Switzerland. The leveling off of growth reflects the fact that investors remain cautious and highly selective in their acquisition decisions, although sentiment has improved somewhat over the past few quarters. Leasing revenue grew 3% across the EMEA, paced by gains in France and the U.K. Belgium and Ireland also saw growth. While modest, this growth comes at a time when occupiers remain hesitant to make long-term commitments and rent growth remains largely stuck in neutral. Property, facilities and project management was our largest business within the region during the second quarter. Revenue growth was robust at 22%. This strong performance is the result of our hard work over several years to build a broad market-leading platform to meet the real estate needs of property owners and occupiers. Please turn to Slide 15. Asia Pacific was our fastest-growing business segment in the second quarter of 2013, continuing a rebound from muted performance in 2012. Overall revenue growth of 16% is particularly noteworthy in light of slowing economic activity in much of the region and the impact of a stronger dollar. In local currencies, total revenue in Asia Pacific was up 20%. Property sales were a strong growth catalysts, rising by 62% or 67% in local currencies, reflecting our progress in taking market share. Activity was strong across the entire region, especially in Greater China and Japan. Australia and Singapore also saw good growth. This is our second consecutive quarter of robust sales growth in Asia Pacific. This is particularly gratifying considering that investment activity remains subdued across much of the region. In contrast, leasing revenue was essentially flat in dollar terms, but did show growth of 3% in local currencies. Demand for space remained tempered especially for multinational companies. Nevertheless, we saw higher leasing revenue in Australia and Greater China, which was partly offset by a notable decrease in Japan. However, approximately 1/2 of the decline in Japan was caused by the yen's depreciation against the dollar. Property, facilities and project management revenue rose by 8% in the second quarter of 2013 or 12% in local currencies. Our outsourcing business is growing nicely across this region. Recent assignments include Citigroup, Macquarie Group and Oracle. Please turn to Slide 16. Revenue for the Development Services segment, including discontinued operations, totaled $14 million in the second quarter of 2013 versus $17.8 million in the second quarter of 2012. The lower amount resulted from property dispositions, which reduced rental revenue. However, normalized EBIT improved to $7.4 million due to higher earnings from property sales, primarily reflected in real estate gains. Development projects in process totaled $4.7 billion, up $400 million from the first quarter and $500 million from year-end 2012. The inventory of pipeline deals totaled $1.7 billion, down $200 million from the first quarter and $400 million from year-end 2012. Our equity co-investments at the end of the second quarter of -- second quarter of 2013 in the Development Services business totaled $72.4 million, an our recourse debt stood at $16.2 million. Please turn to Slide 17. Second quarter 2013 Global Investment Management revenue totaled $115.9 million compared with $119.7 million in the second quarter of 2012. The decrease was primarily due to lower asset management fees and lower rental income following property dispositions, partially offset by higher acquisition and disposition fees. Global Investment Management assets under management or AUM totaled $88.2 billion at the end of the second quarter of 2013, a decrease of $3.8 billion from year-end 2012. Included in the current AUM is $23.6 billion of listed securities. The decrease from year-end 2012 reflect the portfolio dispositions of $4.6 billion as we helped our clients take advantage of the current sales environment to harvest gains in their portfolios, as well as negative foreign currency effect of $1.8 billion. These were partially offset by gains of $300 million in the value of the real estate securities and direct investment portfolios and acquisitions of $2.3 billion. We remain active buyers of value-added product in the U.S. During the second quarter of 2013, we raised equity capital of approximately $500 million in the direct real estate business and had approximately $2.8 billion of equity capital to deploy at the end of the quarter. Our co-investments in this business at the end of the quarter totaled $191.8 million. Our Global Investment Management EBITDA record reconciliation detail is shown on Slide 18. As of June 30, 2013, we maintained a cumulative accrual of carried interest compensation expense of approximately $47 million, which pertains to anticipated future carried interest revenue. For the second quarter of 2013, the net carried interest incentive compensation expense totaled $2.9 million. We normalized $2.6 million of carried interest compensation expense, which pertains to a fund for which no carried interest expense had previously been recognized. It is our intention to follow this convention for new funds going forward. We did not normalize $300,000 of carried interest compensation expense, which pertains to an existing fund for which carried interest compensation expense had previously been taken. This business operated with a pro forma normalized EBITDA margin of 30% for the second quarter of 2013, an increase of 500 basis point from the second quarter of 2012. The increase was driven by improved co-investment returns and lower provisions for bad debt and legal matters as compared to the second quarter of 2012. Slide 19 shows our liquidity position at June 30, 2013 as well as our amortization and debt maturity schedule for all outstanding corporate debt. As you will recall, in March 2013, we've completed a series of refinancing transactions. At that time, we amended our present agreement to provide for $715 million of partly delayed short-term loans and a $1.2 billion revolving credit facility. This nearly doubled the borrowing capacity we had under the old revolver. We also sold $800 million of new 10-year 5% fixed rate senior unsecured notes. As Bob mentioned, last month, we took the final step in our 2013 refinancing plan, paying down our $450 million 11.625% senior subordinated notes, which were due in 2017. You can see here the benefits of these actions. We have extended maturities far into the future with little debt coming due for 3 years. We reduced total corporate debt by about $500 million and cut annualized interest expense by approximately $50 million when compared to annualized interest expense before the refinancing actions. These actions leave us well-positioned to make strategic investments to drive further growth with increased financial flexibility to be opportunistic and continue navigating an uncertain recovery. Please turn to Slide 20. Excluding cash within consolidated funds and other entities not available for company use and excluding our nonrecourse real estate loans and our mortgage brokerage warehouse facilities, our total net debt at the end of the second quarter of 2013 was approximately $1.7 billion. While this represents an increase of $136.7 million from year-end 2012, due to seasonal incentive compensation payment, net debt is down $272 million from the second quarter of 2012. At the end of the second quarter of 2013, our weighted average interest rate was approximately 5%. This is a 60 basis point decrease from year-end 2012. Our leverage ratio on a covenant basis as of the end of the second quarter of 2013 stood at 1.65x on a trailing 12-month basis. Our total company net debt to trailing 12-month normalized EBITDA stood at 1.7x. This is a marked improvement from 2.19x in the second quarter of 2012. Consistent with historical trends, we expect net debt to decrease during the course of the year. I'll now turn the call back over to Bob for closing remarks.

Thanks, Gil. Please turn to Slide 21. As we reached the year's midway point, we see that our performance in 2013 is generally unfolding consistent with our expectations. Like many business people around the world, we continue to be disappointed in the lack of sustained improvement in the global economy. The more recent heightened concerns about the U.S. Federal Reserve's monetary policies have added another dimension to existing challenges. Nonetheless, CBRE's strengths including our brand, people, flexible capital structure and balanced service offering give us confidence in our continued success amid historically slow and uneven market recovery. We remain highly focused on improving our industry-leading margins while making the kind of operational investments that will help us to better serve our clients and execute our growth strategy. CBRE remains on course to achieve full year revenue growth in the mid- to high single digits, consistent with our long-term business model. Among our major business lines, we expect that property sales will remain strong. Even with slightly higher borrowing costs, institutional and entrepreneurial investors remain highly attracted to the yields available from commercial property relative to other income-oriented investments. Property, facilities and project management services should sustain steady low double-digit growth rates, paced by growing global adoption of occupier outsourcing. Leasing should gain momentum as we realize the benefits of our strategic growth initiatives in this business and underlying fundamentals continue to slowly heal. Investment Management should produce significant carried interest revenue, much of which was anticipated in our initial expectations for 2013. We continue to expect margins to expand by around 50 basis points for the full year, driven by contributions from our Investment Management business as well as the normal acceleration in transaction services activity in the second half of the year. We also remain disciplined around managing operating expenses to a level appropriate given revenue expectations. In light of the strong current sales environment and the opportunity this affords to harvest gains in our Investment Management portfolio, we may exceed our initial expectations for carried interest revenue for the full year. If this happens, we could modestly exceed our original expectations of earnings per share, as adjusted, of $1.40 to $1.45 for the full year 2013. With that, operator, we'll take questions.

[Operator Instructions] Your first question will come from Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Let me just start with from a personnel point of view. How should we expect the pace of broker additions or personnel additions second half of the year versus the first half of the year?

Well, Brandon, Cal Frese runs our Americas. He's obviously with us today, and the biggest bulk of our brokers work for Cal. So I think he's the best one to answer that. And then I'll -- when he's done with that, I'll add on for EMEA and Asia Pacific.

Hey, Brandon. I guess as we've talked about before, we have an aggressive strategy right now to be attracting A players into gaps and open spaces in our platform. And through June, we have attracted approximately 100 new professionals into the business. Now, I have to say that our strategy is not to bulk up here but to really add key players in key markets or key sectors in the business. We think that, that track record will continue over the course of the year. And we feel good about our ability to attract new people into the industry.

And Brandon, this is Bob, adding on with regarding to EMEA and Asia Pacific. It's -- the philosophy we're -- and initiatives we're following in Americas we're following around the world. And we're meeting with success adding good people to our team everywhere. We've -- last quarter, we had Jack Durburg on the call, our Global President of Brokerage. And what we've asked Jack to do for us is to drive this initiative around the world. So we're seeing around the world what Cal is seeing here in Americas and we're quite pleased with it. When we talk about this incremental investment in our business, this is one of the areas we're really focused on, is adding production talent. In addition to that, we're adding management talent and investing in technology and some other platform aspects of our business. But we're really focused on adding production talent. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Okay. Shifting gears a little bit. Any lingering effects that you guys have seen as you've worked into July from all the noise in kind of May and June around rates picking, or have you seen pipeline conversion rates change here in the U.S. or I guess in the U.K. also?

Can I jump and grab that again? We're watching this obviously very closely, I'd say, day-to-day, but it seems hour-to-hour in some ways. But based on the anecdotal evidence so far, I think we've seen relatively minimal impact on really either pricing or volumes to date, particularly for core assets and in those gateway cities. When you think about it, the capital remains abundant, particularly again for core assets. Real estate remains an attractive asset class for the traditional reasons of diversification and inflation hedge, but also importantly, continues to offer attractive returns relative to other asset classes. So we believe a modestly improving economy will continue to trend of improving fundamentals, which will help. So all in all, we think the second half should continue to be strong in the capital markets business.

And I would only add to that by saying that there's the environment we operating in and then there's what we're doing within that environment. And this kind of links back into that first question, Brandon, and that is we are aggressively working to improve our capabilities. We're starting to feel that in our results. And so we're hopeful and expecting that the markets will act around the world the way Cal has described. We're also hoping and expecting that we'll perform a little bit better than that because of some of the steps we've taken. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Okay. And then final one for me. Within GCS, maybe kind of a two-part question, what is your exposure to kind of it's called the brick-and-mortar retailers look like? And then any sense of the wins that you talked about in GCS this quarter, a geographic breakdown? Is it all Americas or was it spread across the regions pretty well?

Why don't I hit that, Cal, just globally on GCS and you can talk about the Americas. We do have some exposure to brick-and-mortar retailers within GCS. But actually, some of the challenges that they're facing is causing them to be interested in our services and everything from disposing of spaces to managing space while they get back to focusing on their core businesses, so on and so forth. So we're not feeling, Brandon, any negative effects of the movement to online retailing from brick-and-mortar retailing in our business. We do a lot of retail facilities for banks and that's been very good business and positive business, unaffected. On a relative basis, our GCS business is much bigger here in the U.S. than it is in other parts of the world, but we had a very good growth quarter outside the U.S. in GCS. So that was encouraging. Cal?

All I would add is that I think that of those contracts, most of them actually had an Americas component to them. But what we're seeing in our pipeline is larger opportunities with international pieces to them. So it's all been pretty good.

Our next question in queue will come from the line of Anthony Paolone with JPMorgan. Joseph C. Dazio - JP Morgan Chase & Co, Research Division: It's actually Joe Dazio here with Tony. Wondering if I could dig into the gross margin a little bit again. Gil, can you clarify, I think you said that it went down because there were regions in which there was a fixed cost component for producers that saw a decline in transactions, did I hear that right?

You did. So you've got a couple of things going on that are affecting the move in terms of cost of services versus revenue. And essentially, as you know, cost of services in general will move with revenue, particularly when it's commission based or transaction based, less so in the outsourcing business. But we had a revenue decrease in the principal businesses, which have no cost of services component. So when you have a revenue decrease, their cost of services is not moving down there because it's all in OpEx. And then we also had 1 or 2 countries, in particular, that have more fixed cost structures than, let's say, using the U.S. as a compare where we have a commission structure. We've got a couple of countries where revenue was down, but cost was not down commensurate with revenue. And that's having any impact, if you will, on the ratio of cost of services to revenue because they're not moving in like kind in those 2 instances. Joseph C. Dazio - JP Morgan Chase & Co, Research Division: And is that primarily in EMEA where that occurs?

Actually, not. The largest one was actually in Brazil. Joseph C. Dazio - JP Morgan Chase & Co, Research Division: Okay. One other, I guess, margin-related question. The incremental EBITDA margin looked like it was about 16% or so. And I guess, just kind of curious how you think that number -- how much do you think that number could have potentially expand? I guess, the transaction businesses -- we've been using the rule of thumb they produce overall margins of about 20%, so the incremental margins could be higher. So do you think that 16% could go up from here, or do you think that the impact of the outsourcing business is so great that it kind of pulls that down, there's not a whole lot of upside?

Joe, this is Bob, let me comment on that and then Gil will probably have some follow-on. First of all, part of what you're seeing in our margins this quarter and you will see in our margins throughout this year is this choice we've made about incremental investments in our business. And we very specifically and very strategically and with the endorsement of our board, I might add, put a program in place to invest incrementally in our business because we think we're situated in the marketplace such that we can really benefit from those investments. So investments in talent, investments in some local market managers to drive the business, investments in IT and research and things like that in our platform. We've articulated in the first quarter and I'll repeat here, we think that the net incremental investment for the year is about $40 million. We think that'll have an impact on our margins for the year of about 80 basis points relative to what they would have otherwise been in the second -- excuse me, for about 50 basis points for the year. In the second quarter, we think that impact was about 80 basis points. We are very, very focused on those investments. So when you look this year at the margin associated with incremental dollars of revenue, you're going to see something slightly different than you would have seen from us historically and probably something slightly different than you're going to see from us prospectively, because this is a year where we're ramping up and catching up a little, making some investments that we need to make. So that's part of what you're seeing in those numbers. And Gil, I don't know what you'd want to add to that.

Yes, the only thing I would add for you to consider, of course, is we're in the second quarter and it's a 90-day period. And so what you were sort of suggesting in terms of as the year goes on, it is true that the pie shift naturally with the seasonality of the transaction business. And accordingly, the impact on a full year basis will be different than on -- just on the second quarter or the first quarter.

Can I just -- do you mind if I -- this is Cal, CEO of the Americas. I simply would say that there's tremendous alignment among the management team on these strategic investments that Bob's talking about. And everyone across the world is intensely focused on managing the business extremely carefully because we're laying in these strategic investments, which we believe will be high-yield investments. So we're on it. I think we have this reputation. I've been here for 15 years and was COO of the Americas at one point in my career and we're very focused on running an efficient business. Joseph C. Dazio - JP Morgan Chase & Co, Research Division: Is there any, I guess, goal with respect to incremental margins? I know in prior years you've talked sort of the 20% corporate margin goal being out there. But with these investments, does that kind of change any of the thinking as to how that could trend over the next couple of years?

What we've talked about is where we think we're going to get to this year, Joe, which is 50 basis points of margin, increment above last year after taking into account those investments. And again, we think those investments are going to cost us about 50 basis points of margin this year. So said differently, we would have expanded about 1% this year in the absence of those investments. Joseph C. Dazio - JP Morgan Chase & Co, Research Division: All right. And then last question, the leasing growth, it looks like it's kind of in the low to mid-single digits globally. Is there a way you can roughly break that out and maybe do it regionally, if you can, by the different buckets that drive leasing revenues up? So in other words, how much of that growth is from rents going up versus lease durations going up versus square footage going up?

Joe, the short answer is essentially it's still a volume velocity driver. So it's really more about the number of transactions being up because the rental rates are up in some places, but in the U.S. they're up a little bit, not very much; and in Europe, they're pretty much flat; and I think more or less the same for Asia. So it's really still about volume more than anything else.

What we do know is that in the second quarter, the volume of leases we did was up slightly and the size of those leases in terms of dollars was up slightly. So you had the cumulative effect of those 2 things. But that's an aggregate answer for what we saw around the world and across product types.

Our next question in queue will come from Will Marks with JMP Securities.

Let me first ask, Gil, do you ever comment on where net debt could be year end in terms of -- based on hitting your guidance or just any related thoughts?

Well, no. The only statement that we've made is naturally net debt will go down as the year progresses because of the seasonality. But we haven't given a number in terms the way net debt would be at 12/31.

And let me say, Will, we talk about the investments we're ranking. The investments that Cal and Gil and I have been talking about so far in this call are income statement investments. We're forgoing some short-term income. We also have an aggressive plan for making balance sheet investments with our capital. We're co-investing in our Investment Management business. We're co-investing in our development business. We're -- we have M&A we're looking at and we were doing capital expenditures for technologies. So all of that's going to play into that net debt picture between now and the end of the year.

Okay, that makes sense. Second question on the guidance. Just to be clear, I think you have been clear, that the potential upside in guidance does not relate to your particular investments sales revenues being higher than expected. It's rather how that drives the asset management revenues?

Well, the incremental -- if there is an incremental, it's purely related to CBRE global investors and carried interest. That's got nothing to do with capital markets. So just to be clear, it's all about the potential for carried interest that we see as high. That's what's driving that comment about the flexibility of exceeding where we're at.

Okay, great. And then last question, more big picture on leasing conditions. I don't want to put words in your mouth because it may not have been you guys have commented. But we have heard from, at least others, that second half leasing revenues, maybe it's just domestic, should be higher than first half, meaning growth rates should be higher. Do you think that's a fair assumption, and can you talk about outlook overseas as well?

Let me start in the Americas. We did, at the beginning of the year, forecast that the economy would improve during the year and leasing would get stronger as the year progressed. And really, notwithstanding the choppiness that we see today, anecdotally and from everything we see in market, we continue to believe the second half will be better. Job growth and improvement in housing are having impact on the consumer and the related specialties, particularly warehousing and retail sentiment, is improving based on what's happening in Europe. Sovereign debt issues and consumer confidence is actually higher today than 1 year ago and it's at a 5-year high. So with real estate fundamentals improving and the activity levels that we see, we really have a general confidence that the second half is going to be better.

Will, I'd say, this is Bob. I'd say for EMEA, that's where we're at as well. We think that the second half should be better. London is such an important part of the business, not only for ourselves but for the companies we compete with over there. And there's reason to think that, that would improve in the second half. Germany, same thing. Obviously, Southern Europe, Spain, Italy is challenged, but that's not as big a part as our -- of our business. We're waiting to see what's going to happen in France, and in particular, in Paris. But I think, on balance, we think it should be a little better in EMEA in the second half. Asia Pacific is a little bit different story. The domestic companies and the domestic part of the economy is where there is more activity now and the global companies that operate there, the multinationals or the companies where we're seeing less activity, the global real estate companies like ourselves tend to do more of our business with those global companies. And as a result, we're less inclined to think that there's going to be a material pickup in the second half in Asia Pacific than we are here in the United States or in EMEA.

Our next question in queue will come from David Ridley-Lane with Bank of America.

So I'd guess, consensus thinking was the first 100 basis points increase in interest rates wouldn't have an impact on investment sales volumes. But I don't think anybody was thinking that, that would happen in such a brief amount of time. So just wondering historically what's been the effect of an interest rate shock on your investment sales in the next 3 to 6 months? Have potential buyers stepped away from the table?

Well, it depends on the situation surrounding it. If it's akin to a pickup -- a material pickup in economic activity and the economy getting better, as my colleague Cal Frese likes to say, it's hard not to feel good about the things that improved economy would do in our business -- to our business. So we think if there's a material spike up in interest rates, it's probably going to be because there's a materially better view about what's going on in the economy. And so, we believe that, historically, that's kind of in the case. If there was something else going on beyond that, that wasn't tied to the economy then at some point that would be, in all probability, a drag on the capital markets because there are significant number of leverage buyers out there. It also though, always depends on what the alternative investment classes they are doing that are available to investors, and real estate is becoming an increasingly accepted investment class. Cal, I don't know if you would...

I would only say that what happened in June was abrupt, but anticipated. And I think the world was ready for it. I'm not saying it hasn't had any impact. But again, anecdotally, looking at our own volumes, and demand in the capital and the business, we seem to feel that's pretty good. I think people reasonably expect that interest rates could continue to rise, but so long as they do that in a way that people can anticipate and manage into their forward-looking outlooks, then it can cause a pause from time-to-time, but it is manageable. And we've seen this over every cycle.

The other -- I think the other interesting about this, David, is that the place where we think we're most vulnerable to dampening an investment property's activity from increased interest rates is in the second tier markets. Because the first -- the primary markets around the world are being driven by other dynamics, the value of properties. So we think it's the second tier markets where you'll see the biggest impact from interest rates. Ironically, we also think it's the second tier markets where we'll see the biggest impact from an improved economy. So those 2 things really should offset each other to a degree. Obviously, if either into that gets extreme relative to the other, you're going to get results that reflect that.

Got it, okay. And then in Investment Management, would you expect that disposition is going to outweigh acquisitions in the second half as well?

Yes, this year. Well, dispositions are going to be very material. There is a chance that we could ramp up acquisitions to be on par with dispositions. But the general repetition of our leadership team in the Investment Management business is that this is a year we're going to be harvesting because our clients want us to be harvesting. And then we think that starting next year, you'll see the opposite effect take place. But we are in an aggressive harvest mode because that's what the investors did. We work for one.

Got it. And then when you look at the 2013 forecast that you put in your slides for absorption, all that -- all those forecasts were up. I think office was up 26 million square feet from 19 million last quarter. And so, I'm sort of wondering, if that forecast is realized, are we talking about -- and definitely heard your comments earlier on the call about pickup in leasing momentum, I'm just wondering how substantial that momentum could get? Are we talking about high single digit here or more sort of in the mid-single-digit range?

Yes, it's not high single digits. It's -- it'll be in the middle range, maybe improved over where we are. But remember, we're in the low single digit at this point in the U.S. in particular. And so I think there'll be some improvement with an improving economy, but not dramatic. And again, we believe we're outperforming the overall activity in the market and we believe that, that will continue as well.

At this time, there are no additional questions in queue. Please continue.

Okay. Well, thanks everyone. And we'll talk to you again next quarter.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.