Ladies and gentlemen, thank you for standing by. Welcome to the ING REIM Closing Conference Call. At this time, all participants are in a listen-only mode. You will have an opportunity to ask questions after the presentation. If you have a question, please press *1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. If you are using a speaker phone, please pick up the handset before pressing the numbers. As a reminder, this call is being recorded. I would now like to turn the call over to our host, Mr. Nick Kormeluk. Please go ahead.
Thank you and welcome to CBRE's ING REIM Closing Presentation and Conference Call. Yesterday, we announced that we completed the acquisition of ING REIM 's operations in Europe. The purpose of today's call is to share additional details about this acquisition and its benefit to CBRE. This conference call is being webcast and is available on the Investor Relations section of our website. Also available is a presentation slide deck posted about 30 minutes ago, which you can use to follow along with our prepared remarks. An archived audio of the webcast will be available on our website later today.
Please turn to the slide labeled "Forward-Looking Statements." This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future growth momentum and financial performance, as well as the successful integration of the acquired ING REIM businesses, our ability to leverage the integrated platform to grow our market share, and the projected performance of and risks relating to the acquired ING REIM businesses relative to the price we paid. 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 third quarter earnings report filed on Form 8-K, our current annual report on Form 10-K, 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, 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 most directly comparable GAAP measures, which are attached here to within the appendix. Please turn to slide three.
Our management team members participating with me today are Brett White, our Chief Executive Officer, Gil Borok, our Chief Financial Officer, and Jim Groch, our Chief Investment Officer. I'll now turn the call over to Brett.
Thank you, Nick, and good afternoon to everyone on the call. I think you all are familiar with Nick, Gil, and myself, although many of you have not met Jim Groch. Jim is our Chief Investment Officer. Jim was also the lead negotiator on these ING-related transactions. I don't think there's an aspect of the acquired business that Jim isn't fully aware of, and I suspect you'll be hearing more from Jim during the Q&A. This presentation is split into four sections. The first section is just a list of headline points I'm going to run through with you briefly. Jim will present the slides that discuss the fit between the ING acquired business and our global investment management business, and also some fairly deep discussion around the nature of these funds, how fees are paid, those sorts of things.
By the way, we have never in any of our earnings presentations been this open or forthright about the intricacies and inner workings of these funds. We are doing this to open up the transparency a bit in an effort to make sure all of you understand how these businesses work and how we're paid. After the fit description, which Jim will do, Gil will take you through the two pages of financials, and finally we'll break to Q&A at the end. Let me begin with why this deal matters. I have six bullets here I want to talk to you about. First, it fulfills our 20-year objective of being the number one firm in each of our six business lines. I've referenced this before to you on our conference calls, but this is a very important, very serious thing to us.
We set this objective back in the early 1990s. It took us 20 years to get here, but for those of us who were around then and who've been working on this for two decades, this is a very important moment for CBRE. Second, it accelerates our objective to further balance our earnings between transactional and contractual businesses. I think all of you are very aware that this has been a top priority for this firm again for many, many years. We began talking to you about this the moment we went public, and we haven't stopped talking about it since. We have been able to make serious progress in this area, both through the acquisition of the Trammell Crow Company and now the acquisition of the ING Real Estate Investment Management business.
Third, like each transformative acquisition before it that we've done, our Best Athlete philosophy allows for a significant enhancement to our already best-in-class capital. I think all of you again are very familiar with our philosophy around Best Athlete, and this deal is no different. In this transaction, the overall business is going to be run by Matt Currie, who ran the CBRE business, but all three geographies acquired, I'm sorry, each two geographies acquired in the securities business will be run by former ING executives who held those roles. We are very, very pleased to be able to create a senior team in that way, and we of course believe this is one of the primary reasons this integration has gone so well, and we have two teams so eager to get to work together.
The transaction adds over $55 billion in AUM, which will produce significant and recurring services revenues. We've also talked to you about this before, which is we do not have the luxury of being hired for all the services that the Real Estate Investment Management Company hires. However, in general, we're hired for about 65% of those services, and the ING deal brings us in their $55 billion to capture share with and sell into very, very significant synergistic revenues. Next bullet, something we're actually quite proud of. This transaction was one that was fiercely fought over. There's no deal we've pursued in our history that had a who's who of private equity, financial, and strategic bidders all vying for this business. When the process started over a year ago, I think that many of them thought that our chances to prevail here were quite low.
In the end, we not only prevailed, but we prevailed on all the businesses that we wanted, and we're very proud of that. We also feel with some good comfort that we were able to strike a very fair and well-timed price. Finally, this transaction creates the premier Real Estate Investment Management Company in Europe, U.S., and Asia Pacific. We now have a Real Estate Investment Management platform that's not only the largest in the world, but also spans every major geography and allows us to handle capital clients in a way they've never been handled before. We think that will lead to great synergy, great transfer of capital across the geographies, and great transfer of fund strategies among our own business through best-in-class practices. With that, I'd like to turn the call to Jim Groch to talk about the fit between the two firms. Jim?
Thank you, Brett. As we looked at the opportunity to expand our investment management platform, the ING businesses really were a surprisingly good fit in almost every way. Our business was a predominantly U.S.-based business, ING's business with a heavy focus on the Europe platform, the securities business, and a much larger Asia platform. ING's focus has been primarily value-add and opportunistic. I'm sorry, CB's business has been primarily value-add and opportunistic, with ING's being a heavy, heavy core-focused business for the most part. Also, just the general fit of the investment management business with CB's other services businesses was quite nice. Please turn to slide six. This gives you a little bit more of a detail of how the CB business fit with the ING investment management platform.
If you start at the right, you'd see the Americas business that is primarily a CB business, actually entirely a CB historical business. If you look at the Asia platform, that substantially came from ING. If you look in Europe, starting with the UK, CB had a very strong separate accounts business, ING a very strong core funds business. Move to continental Europe, a massive core business from ING. We have the two global products, which both companies were in. These are very nice businesses. The fund-to-funds business, both CB and ING were in that business, but you put the two together and you have about $12 billion of assets under management, a very scalable, high-quality business with high-quality leaders. The global securities business, again, CB was in the business, but ING is a market-leading position, particularly with a focus on global-oriented funds.
This gives you a bit of an overview of how nicely the products fit by region and focus. Please turn to slide seven. I'd just like to hit you with a couple of points on Europe in particular. First of all, the European platform highly focused on core assets, ING's business in Europe, probably about 97% core assets. With that, you see a fairly steady fee stream, generally modest leverage. The platform was highly diverse by sector, country-specific funds, as well as pan-European funds. Also a very significant institutional focus. All of these businesses are institutionally oriented businesses. They're generally almost no orientation to retail investors. The specific fund that's referenced here as an example is a Nordic Property Fund. This is an open-ended fund. It's a core fund. The assets are located primarily in Sweden, Finland, and Denmark. The assets today, the asset base is 95% occupied.
It's about a EUR 1 billion fund. The fee stream here is calculated as most of the funds in a similar fashion to most funds, i.e., here's a 75 basis point fee based on the gross asset value. The values in these private equity funds don't tend to change radically quarter to quarter. They can tend to move somewhat slowly over time, but there's always exceptions to the rule there. There are transaction fees and performance fees, which particularly late cycle create some nice opportunities. Please turn to slide nine. I'm sorry, slide eight. Slide eight is a reference to a couple of points I'd like to make on the Asia platform. In this case, the Asia platform is more similar to CB's platform, but just larger in scale. The focus here is on value-add and opportunistic properties, partially because that's the base of opportunity in that region.
There are some core funds, and as an example, ING has taken over some large core separate account funds, as well as other opportunities in the region. Similar fees are oriented a little bit more to what we might see in the U.S. The base fees tend to be higher, just given the more active management that's required on value-add and opportunistic funds. They also bring performance fees that are significantly higher as well. At this point in the cycle, you see minimal, if any, performance fees, but late cycle, you tend to have some significant opportunities. There's a specific fund here we give you as an example. It's the China Opportunity Fund. In this case, it's a closed-end fund. Most of the closed-end funds run target five to seven years for the initial term, with extensions thereafter. Here, of course, a higher performance fund, potential for higher leverage.
The focus of this particular fund is China and residential. Here you see the asset management fee structure is about a point and a half on equity invested plus performance fees. We give you a couple of examples of assets that are held within that fund. Please turn to slide nine. Slide nine highlights the securities business. For those of you who are familiar with Cohen & Steers, I would say that's the closest comp to the ING securities business. This is a global securities business. There's no leverage within the funds. The bulk of the investments are in REIT stocks globally. The fees come off of the asset base. There are some opportunities for incentive fees. Of course, this business, the fees and the values will move with the market. This is a very high-quality business that's outperformed the industry benchmarks over a long period of time.
The global focus of this fund was well ahead of most other competitors in the marketplace. The mandates, as you can see on the pie chart at the bottom left, about 55% of the total are in global mandates. We're allocating not only to individual stocks, but by region as well. Heavy focus on funds and annuities, closed-end funds, and separate accounts. With that, if you please turn to slide 10, I'm going to turn it over to Gil Borok, our company CFO.
Thanks, Jim, and good afternoon, everybody. Many of you have seen this slide before. It reflects the significantly positive impact of 120 basis points that the acquired ING REIM businesses would have had on a pro forma basis on our overall earnings for 2010. This gives a directional indication of the type of margin impact that these businesses could have on the total company in future years. If you turn to slide 11, just talking about the financing, assuming the maximum purchase price is spent relative to the ING REIM Europe business and the maximum co-investment is made there, the transaction, including purchase price, co-investments, and deal costs, will total about $1.2 billion.
This has been or will be funded with $400 million of Term Loan D that is due in 2019 at a price of LIBOR plus 350, $400 million in Term Loan C due in 2018 at a price of LIBOR plus 325, and then $400 million in either cash and/or minimal short-term revolver borrowings as needed, depending on what happens with the ING REIM Europe situation. To date, $950 million has been spent. $800 million of that obviously came from the Term Loan D and C, just a very small amount of borrowings on the revolver, about $40 million, and the rest in cash. Performance for the transaction at September 30, 2011, on a trailing 12 basis. The estimated leverage ratio, simply net debt to normalized EBITDA, not covenant, is about 2.5x . We've said that before and just reiterating that.
Likewise, we've said before and just reiterate that no equity was used for the transaction. With that, I'll turn the call back over to Brett.
Thank you, Gil. Under the heading of what else you need to know, I have six quick bullets here. We are now the largest commercial real estate investment management company in the world with almost $100 billion in AUM. The ING Clarion Real Estate Securities transaction, as you know, closed on July 1st for consideration of $324 million and co-investments of $59 million. ING REIM Asia closed on October 3rd for consideration of $45 million and co-investments of $17 million. Finally, ING REIM Europe closed on October 31st, 2011, for consideration of up to $540 million, of which approximately $440 million has been paid and co-investments of approximately $75 million to be made over the next several months. As I was preparing this deck last night, I realized that we announced the Trammell Crow acquisition on Halloween in 2005, and here we are announcing this deal as well.
I don't know what that means. The ING REIM 2011 results are significantly outperforming our internal expectations and model, which is good. Finally, contribution to CBRE 2011 earnings per share will be slightly accretive and has been included in CBRE's Q3 2011 guidance. With that, operator, we'd like to open to questions.
Operator? Operator?
Yes.
We'd like to open to questions.
Yes, ladies and gentlemen, if you wish to ask a question, please press *1 on your touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speaker phone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press *1 at this time. Our first question comes from the line of Will Marks with JMP Securities. Please go ahead.
Thank you. Hello, Brett, Gil, and Jim.
Hi, Will.
First question on the seasonality of the fees you're going to get from ING and maybe just the overall platform.
Right. There shouldn't be any seasonality to the fees, Will, because these are primarily asset management fees that are paid on gross value of the assets. There is no seasonality to valuation. Certainly, the incentive fees come through one time a year. Jim, do you want to comment at all on the timing of those?
Yeah, it does vary by business, but there tends to be a Q4 orientation to the performance fees. Also, the transaction fees hit, you know, generally the transaction volumes are higher in Q4. Otherwise, the bulk of the fees, as Brett indicated, are base fees and they're flat throughout the year.
Will, I should mention that this business we acquired is quite different, as Jim said, from our investment management business. In our investment management business, you get these lumpy and sometimes very large promotes. This business isn't like that. This business is primarily all about the management fee. The incentives that we earn, particularly in the Europe business, are not very large. Nice to get and material, but not that large.
Okay, thank you. Second question, just on the second to last bullet on slide 12, outperforming internal expectations. I don't think, maybe you did give us some idea of how 2011 was looking. We know 2010, I assume 2011 was a growth year and is 2012 expected to be another. Those are putting words in your mouth, but any thoughts on that? I know you're not giving specific guidance.
No, Will, all I want to say on that comment is what I said, which is, you know, we certainly have a model we built for this business when we went through the due diligence process. My comment relates to that, which is based on that model and how we structure our deals, doing better, but not in a position to talk about the balance of this year or 2012.
Okay, and then just last question. The $150 million of costs, how does that flow through the P&L? How are we going to see that going forward?
Gil?
Yeah, thanks, Brett. You've already seen some of it come through through 9/30 and it's been normalized. That's been about $35 million of cost, including financing. The financing part was capitalized. The rest of it was expensed. Most of the rest that comes through, in fact, all of the rest that comes through will be P&L and will be normalized. We'll call it out.
Okay, I mean, based on what we won't see broken out in the P&L, what does that do to the margin, which was running above 30% for that business? Does it significantly reduce it in the near term?
Gil?
I'm not sure I understand the question. What you won't see in the P&L would be simply the financing costs that go to balance sheet. The other costs will flow through P&L, but they'll be deal costs or deal related, whether it's retention, severance, or any of the like. That'll be normalized out. You will see a run rate or operating margin, if you will, for the business.
Okay, so in that merger-related charges and others, some of it will show up there?
It'll show up there, and that'll be the deal cost. Yeah, sort of, let's call it one time.
Right, fair enough. Okay, that's all for me. Thank you.
Thanks, Will.
Thank you. Our next question comes from the line of Sloan Bohlen with Goldman Sachs. Please go ahead.
Hey, good afternoon, guys. Brett, just a first question on investor reaction. I know you guys talked at the onset of the deal or when it was announced about some potential for the pricing to, I guess, float along with where assets under management were for the deal. Can you just talk about the stickiness of the assets under management?
Sure, Sloan, I'll give you a global response to that, and I'll let Jim add any color that he feels is appropriate. We believe we won this business primarily around the idea that the dedicated teams within the ING REIM business felt that bolting onto our platform would be the best place for them to be, and the most likely that they would get an affirmative consent from their clients to the transaction. During the closing process, that theory was proven out many times over. What I would tell you, and these are conversations that I've had with investors, that Jim has had with investors, and the ING team has had, the investors also, I think, were relieved that we were the buyer and excited about the synergy that being part of a firm that only deals with commercial real estate will bring to them.
They were formerly in a business that was owned by a company that's not primarily a real estate services firm, and ultimately that got sold. They don't like being sold. They don't want to be sold again, and we're not going to sell them. I think that globally speaking and generally speaking, the investors were very happy with us as the buyer and very happy with the strategy going forward. Jim, do you want to add anything to that?
Sure. Let's see. Sloan, you had mentioned both the AUM numbers. First, I would just mention the AUM numbers are somewhat volatile with regard to impact from FX, as the exchange rates have been swinging all over the place. On the securities business, depending on where the markets are, you can have in a 30-day swing a 5% movement pretty easily just on those two factors. As far as the second part of your question on clients and management team, I would just echo Brett's comments. We've had very, very positive feedback. I think this was a large complex business, particularly the European platform. Investors were attentive in making sure that none of the, they weren't impacted in any way by the change of ownership. I think they were very pleased with the outcome as to the process in the end and how their interests were carefully protected.
Okay, just to be clear, there hasn't been any specific redemptions from investors, and if not, is that period of, I guess I can redeem any time, but for the sake of the deal, it's closed now. From your standpoint, you don't expect any redemptions because of the transfer of ownership?
Yes, I mean, I wouldn't, I can't, I don't think we could say there are no redemptions. Securities business alone can have, you know, $4 billion or $5 billion coming in and offset by coming out on any given 30-day period. Clearly, there's kind of normal course redemptions. As far as any kind of material redemptions in any of the businesses, I would say nothing at all jumps to mind. We had a modest reserve in our underwriting of the business for redemptions, and we really didn't even dig into that.
Okay. Brett, I just had one question about a comment you've made. Maybe kind of refresh us as to what the cross-selling opportunity is from taking on $55 billion of assets under management and what that means for your other businesses, whether it be brokerage or appraisal. I think you referenced a 65% number. I was wondering if you could kind of elaborate on that.
Sure. The synergy, Sloan, runs both ways. Let me start with a side that you did not ask about, but I think it is equally relevant. If you are in a real estate investment management company, the perfect world for you is perfect information on the asset class that you trade. Most investment management, real estate investment management companies do not have that, but they covet it. In this transaction, we are able to bring the ING funds over and their dedicated teams over, bolt them on to the services company, and bolt them on to proprietary research and other things that they will find very, very helpful in their investment strategies. If you were to talk, Sloan, to any of them, and at some point you will get to meet them at our investor day, perhaps next year, that is what they will tell you.
They are very, very excited about the idea that they are with a firm now that has deep, deep knowledge around the asset class. Going the other way, the investment management company is a client, and they purchase a huge amount of services each and every year from firms like us. Historically, our penetration has been around 65%. That, of course, is a generalization, and it moves all over the place. It is better than 1/2 and less than 3/4 of the business that they put out we get. It is important to note that in the investment management companies, all the folks in the property teams or the fund teams have no interest, financial or otherwise, in the success of CBRE. They do not own stock. They do not have any of those things. Their incentives are purely around the performance of the fund they manage.
We believe that we ought to have 65% share in every service we sell to everybody. We do not. We have some selling to do. The investment management folks are smart, and they believe that about that percentage of the time, they are better served using CBRE. That is the two-way flow of synergy.
Great. All right. Thank you guys for doing the call.
You bet.
Thank you. As a reminder, if you have a question or a comment, please press *1, and we will open your line. Next, we have Brandon Dobell with William Blair. Please go ahead.
Thanks. Maybe dovetailing off the last couple of questions, how did the retention on the portfolio manager level shake out for you guys when it was all said and done?
Yeah, we, again, I'll let Jim give you the granular detail. I'm not aware that we lost anybody at any level other than those folks that were redundant based on the two platforms. Jim, did I miss someone?
No, nothing that comes to mind, really. I would say it was very, very, very smooth integration in that regard. There is some overlap in a couple of areas, but those were modest.
Okay, and then taking that one step further, what kind of timeframe should we think about for you guys to get all the back office, marketing, all those kind of functions or processes squared away, integrated, and streamlined down to the usual kind of CB mentality of running a business? I guess embedded within that is, as you know, you've had a little more time to spend with the people there. Do you see more or less opportunities to get all the global assets on the same platform and be more efficient, or is it going to be tougher to do that?
Yeah, I'll give you two answers on that, and then I'll let Gil give you the technical. First, subjectively, or just looking at the business globally, the integration of those items you discussed, so systems, platform, marketing, that is pretty much done. We've been working on that for nine months now, and it's gone very, very well. The test on that question is when will you see the merger-related charges burn off? Gil, would you answer that?
Yeah, sure. Brandon, I think most of it will be done by June. We could see a little bit in the third quarter next year.
Okay. In terms of the way we look at the business and are able to take advantage of the opportunities that are out there in these two businesses, we are doing that today. The executives at the ING REIM business have been very much in dialogue with our executives. They understand exactly what their roles are. That was part of the deal for them. They needed to understand how all this would work. I think it's fair to say that in Europe, in Asia, in the global securities business, if you would talk to these folks today, they would tell you that they are off and running and are very excited about that.
Thinking about the funds, a couple of questions there. One would be within the global mandates, how do we think about the different geographic concentrations or exposures? I'm not sure what the right way to ask this question is, but as you look across the ING business, are there big chunks of funds that are nearing end of life, those kind of things? I guess just trying to gauge the risk of a decent chunk of assets walking away from you guys. It sounds like that's not too much of an issue given how much time you spent with it, but trying to gauge if there's, you know, if we should be asking the question in 2012 or 2013, if there's decent funds that are coming up for end of life.
Right. I'll let Jim give you the specifics. Again, generally, this process that ING and their dedicated teams just went through, seeking consent from these LPs in separate accounts, really flushed out any investor that had any angst about remaining in these funds. This was their time to get out. As Jim mentioned, no one did, and no one material did. The burn-off of some of these funds, you know, they have open-ended funds, which live forever, and they've got closed-end funds. They have a termination on them. Jim, do you see any redemptions coming down, large ones coming down the road next year?
There are a couple of closed-end funds that are coming up from time to time, year to year, but nothing of, you know, no real heavy concentration. I think if I look at a couple of funds that are coming up, I think extensions are more likely than not. The business, particularly the European businesses, is more heavily weighted towards open-ended funds. I think there'll be new capital raised. I think there's potential for some closed-end funds over time to be realized. Nothing significant or worrisome, no huge concentration in any next couple of years. I think that picture looks pretty good.
I should also mention that one of the terms that Jim negotiated on our behalf was to create an exclusive mandate with ING for 10 years. Anything they do in the real estate investment management space, they do through us. That's a very important term because they're a very big player in these funds, and we know that we'll have their investments now for a decade, which is pretty terrific.
Maybe dovetailing off of that for a second, as you looked at the performance, I guess kind of year to date, or maybe a different way of asking Will's question, has the AUM captured or AUM performance been above expectations, or has it been more on the margin side of the ledger?
Just on financial performance, not AUM.
Okay, fair enough. Final question, I know that there's going to be transaction fees associated with the portfolio. Over what timeframe should we expect to see other kinds of revenues, whether it's leasing or property management opportunities, show up out of these funds for you guys?
Yeah, it's a very good question. It will work this way. There will be, or are at the moment, opportunities for the ING dedicated teams to move business now. If they've been using a service provider that they're unhappy with, or they feel for whatever reason CBRE would be a better fit for them, they can do that now. You may recall, Brandon, that we have made some acquisitions in Europe of late, specifically with this in mind. We have purchased a retail property management business. We're purchasing some people. We're doing things to make sure that we get our share of that business. I would say that the bulk of it will move as these opportunities move. They're not all available today. They're locked up with other service providers.
When the time comes that the business can be moved gracefully, that's when I suspect you'll start seeing more of these come through. Frankly speaking, I'd be disappointed if we didn't see some of them by the end of the year.
Fair enough. Great, thanks, guys.
Yeah.
At this time, we have no more questions in queue.
Great. Thank you everyone for your time. We'll talk to you again at the end of the fourth quarter. Bye-bye.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.