Manhattan Lures REITs Capitalizing on Rising Rents as Sales Lag: Mortgages

Tom Toomey, chief executive officer of real estate investment firm UDR Inc. (UDR), is betting the best rental deal in Manhattan is owning the whole building.
The nation’s third-largest apartment real estate investment trust bought a five-tower apartment complex on Columbus Avenue between West 97th and 100th streets for about $630 million last month, with rents from $2,500 for a studio or one-bedroom apartment to more than $10,000 a month for a penthouse suite. It’s Toomey’s fifth purchase in Manhattan in the past year as rents soar and financing difficulties make it harder for individuals to buy.
“Financing and underwriting are much tighter,” Toomey said in a telephone interview. With purchases requiring larger down payments, “people are going to stay renters for a long time,” said Toomey, who’s based in Highlands Ranch, Colorado.
Strict lending standards for so-called jumbo mortgages have contributed to declining home buying across the U.S. by even the most creditworthy borrowers as issuance of the loans has dropped 68 percent since 2007. Nowhere is that more evident than in Manhattan, where the median price of a two-bedroom apartment is about $1.2 million, almost twice the limit backed by government- supported mortgage companies Fannie Mae and Freddie Mac.
Manhattan rents rose 9.5 percent last quarter to an average $3,121, Miller Samuel Inc. and Prudential Douglas Elliman Real Estate said in a report last month. That’s about three times the rate for the 44 largest apartment markets in the U.S., according to Marcus & Millichap, a real estate brokerage firm. Manhattan rental apartment vacancy rates fell to a four-year low of 0.96 percent last year, down from 1.2 percent a year earlier and 1.9 percent in 2009, according to brokerage Citi Habitats. Vacancy bottomed in 2006 at 0.76 percent.

Wall Street Pay

“The key to the strength of the rental market is tightness of credit,” Jonathan Miller, president of appraiser Miller Samuel, said in a telephone interview. “It takes quadruple-A bizarre credit requirements to get approved.”
Jumbo loans exceed limits set for government-controlled mortgage companies by congress. For New York that’s $625,500.
Wall Street’s pay practices are also making it harder to buy, as financial firms increasingly pay bonuses in stock and deferred cash, said Alan Johnson, managing director of compensation consultant Johnson Associates Inc.
Morgan Stanley, Credit Suisse Group AG and Citigroup Inc. have all reduced senior investment bankers’ pay for last year as revenue slows. Morgan Stanley is capping immediate cash bonuses at $125,000, people with knowledge of the move said last month.

Shorter Commitment

“It’s not a great sign for the financial sector contributing to purchasing apartments because there’s no sense of urgency to buy,” said Johnson. “Rentals are a much shorter commitment.”
Renters outnumber homeowners in the country’s largest cities including New York, Los Angeles and Chicago. More than 77 percent of Manhattan’s occupied units were rented in the decade ended 2010, compared with nearly 23 that were owned, data from the Census Bureau showed.
Nationally, the home ownership rate fell 1.1 percent to 65.1 percent from 2000 to 2010, the largest decrease since the Great Depression, according to the U.S. Census Bureau.
Low vacancy rates and rents that are likely to continue climbing this year have made apartments the “darling” of commercial real estate, according to Ryan Severino, economist at research firm Reis Inc.

Apartment Indices

The Bloomberg REIT Apartment Index (BBREAPT) of 16 publicly traded landlords returned 10 percent in the past year, including reinvested dividends, compared with returns of 6.8 percent for the Bloomberg REIT Index (BBREIT) and 5.2 percent for the Standard & Poor’s 500 Index. Equity Residential (EQR), the largest U.S. apartment REIT, returned 11.2 percent in the past year, according to data compiled by Bloomberg, and UDR gained 10.8 percent.
Toomey said in August that the REIT planned to invest as much as $1.8 billion in Manhattan apartment buildings. Its most recent purchase, about 700 apartment units at Columbus Square on the Upper West Side, was a joint venture with MetLife Inc. (MET), the biggest U.S. life insurer.
They partly funded the purchase with $302.3 million of 10- year fixed- and floating-rate debt from Fannie Mae, the government-supported mortgage company, UDR said in a statement last month. The loans pay 3.8 percent interest.
That compares with a rate of 4.85 percent for a 30-year jumbo mortgage to an individual in New York (ILMJNY) and 4.73 percent nationally, according to Bankrate.com data. For conforming Freddie Mac (NMCMFUS) loans, rates are 3.95 percent, after falling to 3.87 percent this month, the lowest in records dating to 1971.

Housing Limits

Lenders have been wary to issue mortgages for non- conforming loans including jumbos since the housing market started falling in 2006 and losses on mortgage securities propelled the nation into the worst financial crisis since the Great Depression.
For Fannie Mae and Freddie Mac, the conforming limit is $625,500 in high-priced markets such as New York, San Francisco and the Florida Keys, compared with $417,000 for most of the rest of the country. The Federal Housing Administration (FHAVARM$), a government agency with the goal of expanding ownership for “underserved” communities, according to its website, will insure loans up to $729,750 in New York.
Banks and mortgage lenders issued $110 billion in jumbo loans last year, up 5.8 percent from 2010, according to Guy Cecala, publisher of Inside Mortgage Finance. The market has contracted from $348 billion in 2007 after peaking in 2003 at $650 billion.

Origination Volumes

Mortgage origination overall was down 17 percent year-over- year to $1.35 trillion, the lowest in over a decade, according to Cecala.
Lenders and bankers, no longer able to package jumbo loans and sell them to investors, are required to have enough capital to carry non-conforming debt on their books until maturity.
“Some don’t have the ability to keep it on their balance sheets,” Monte N. Redman, president of bank holding company Astoria Financial Corp., said in a telephone interview.
FHA loans are also harder to get in Manhattan, and aren’t available at all for co-op apartments, because borrowers purchase shares in the building’s management company instead of buying the property itself. The FHA does limited lending for condominiums, units individually grouped into a cluster. It insured 107 mortgages for condos in Manhattan last year, compared with 90 in 2010 and 42 in 2009, the FHA said.

Manhattan Sales

Manhattan co-op and condominium sales totaled 2,011 in the fourth quarter, 12.4 percent less a year earlier, according to Miller Samuel and Prudential.
Non-conforming loans nationally accounted for nearly 2 percent of all purchase applications last year, up 33 percent relative to 2010, according to the Mortgage Bankers Association’s monthly profile of state and national mortgage activity.
Those loans have tougher standards such as high interest rates and down payments ranging from 25 to 40 percent, according to Mike Fratantoni, vice president of research for the Mortgage Bankers Association.
“They’re only available to the best credit borrowers,” Fratantoni said.
Financing a purchase with loans above government limits won’t get easier until the secondary market grows an appetite for jumbo loans, according to Miller of Miller Samuel.
The secondary market comprises mortgage bankers, savings and loan associations and large private investment institutions that buy mortgages from primary lenders or investors.

MBS Sales

There are signs of revival for mortgage-backed securities, according to Jan Scheck, managing director at DE Capital Mortgage, a New York-based mortgage consulting firm.
Redwood Trust Inc. (RWT), a real estate investment trust based in Mill Valley, California, has completed four sales of bonds totaling about $1 billion tied to new U.S. home loans since 2010, according to Mike McMahon, managing director of Redwood, which specializes in jumbo loans.
Wells Fargo & Co., the nation’s largest home lender, plans to trim credit requirements this year as it aims to increase its loan volume, according to Greg Gwizdz, sales manager for the eastern U.S. for Wells Fargo Home Mortgage. The bank reduced the cost of loans over $2 million last month and is lowering post- closing requirements for cash reserves, he said.
“We’re seeing a fair amount of demand, we have a strong appetite and we’re doing a lot of volume,” Gwizdz said in a telephone interview.
Wells Fargo funded $13.7 billion in non-conforming loans across the nation for the nine month period ending September, the San Francisco-based lender said. In Manhattan its volume of loans without government backing increased 56 percent from a year earlier.

William Beaver House

For now, building owners don’t have time to wait for the rebound. William Beaver House in Manhattan’s Financial District was mostly empty in 2010, two years after the 47-story condominium tower was built. It’s almost 90 percent occupied after owner CIM Group converted the units to luxury rentals costing more than $8,000 a month for a three-bedroom. A down payment on a $3 million apartment at William Beaver would range anywhere from $750,000 to over $1 million, per jumbo loan standards. A pre-recession down payment, averaging 20 percent or less, would have cost $600,000.
“Without the conversion, the condos wouldn’t have sold or would have sold at half the price,” Bob Scaglion of Rose Associates, the company’s manager, said. Eventually, the owners want to put the condominiums back on the purchase market, according to Heather McDonough, broker for Prudential Real Estate who works to sell William Beaver units.
“The rentals are in high demand,” McDonough said. “In a few years, maybe it will be different.”
To contact the reporter on this story: Christine Harvey in New York at charvey32@bloomberg.net
To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net
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Pat Robertson: We Need To Jail The Bankers Who Caused The Financial Crisis

video
The 700 Club‘s Pat Robertson discussed the banking crisis and glowingly spoke about how Iceland jailed many of the bankers who devastated their nation’s economy by taking out fraudulent loans. Robertson hailed the Nordic nation for its actions and said that Americans should deal with the financial crisis in the same way. “Guess what country is getting itself out of a financial problem by some draconian measures?” Robertson asked his co-host Terry Meeuwsen. “Greece?” she asked. “No, not even close. Iceland!” Robertson exclaimed. “They are putting people in jail. Prime ministers are being indicted. They are going after banks. The people said the banks are ripping us off. We don’t like what they did, and they brought our country to ruin. Suddenly, Iceland is turning around and they look like a big success story!”
“Think we could learn something?” Meeuwsen asked.
RELATED: Alan Grayson Gets Standing Ovation While Bill Maher Panel Mocks Occupy Wall Street ‘Hippies’
“We sure could!” Roberson continued. “We could start putting all of those bankers in jail. There was not one banker prosecuted and so many people were lying, and so-called “no-doc loans” and liars’ loans, and none of them have been held accountable. I’m not for putting people in jail. I’m sick of these — we’ve got too many penalties. Too many penalties, too many criminal sanctions, too many people in prison. But here is an opportunity for the people who wanted, you know, to enforce laws, to enforce that one. There must be some laws against lying on documents. I’m sure there are.”
“Lying to banks is a super no-no,” he added. “It has criminal sanctions, but nobody so far has had to pay the price, but Iceland is leading the way and their GDP is growing, and all of a sudden, they were in a terrible mess, terrible mess, and look what is happening!”
Watch the segment below via CBN:
(h/t Republic Report via Reddit)
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Caixin Online: The basics of Chinese inbound investment deals

By Andrew Ross
BEIJING (
Caixin Online
) — An accelerating number of Chinese companies are engaging in acquisitions and joint ventures in the United States and while it’s generally understood that a large number of other Chinese companies are also considering doing so, many still hesitate.
The first point to note is that the rate of deals is increasing, and is doing so dramatically. A second point is that as a percentage of the total number of deals, small- to medium-size deals make up the majority, although there are a few larger ones, and the buyers are generally not SOEs (state-owned enterprises). Third, the industries of the acquired companies cover a broad range, from technology, apparel, consulting services, auto parts, hotels and many more.

 About Caixin
Caixin is a Beijing-based media group dedicated to providing high-quality
and authoritative financial and business news and information through
periodicals, online and TV/video programs.
• Get the Caixin
e-newsletter

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In 2011, several Chinese companies announced their intentions to enter into deals in the U.S., including Shanghai Pharmaceuticals

, with its publicly stated reasons being to seek new drugs to expand its product line and noting declining overseas prices and a strong Yuan, Bright Food Group, China National Materials Co. (Sinoma)

 and Fosun Group, which stated it is looking at consumer brands. Many Chinese companies are going global in the U.S., more and more will be doing so, and for those Chinese companies for which this makes sense and which proceed to do so, they will be in very good company.
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So what are some of the strategies, procedures and lessons on pitfalls that can be garnered from recent deals?
Perhaps one of the most important points regarding engaging in transactions in the United States is to recall the reaction of many Chinese businesses when foreign companies came to China and sought to dictate that deals in China be done in the same manner as in those companies’ respective homelands. This generated ill feelings and often did and can easily result in failure in a deal. The same is true in the United States. Companies from many different countries make acquisitions in the U.S. all the time, and one of the accepted norms is that the deal will be done in “U.S. style.”
While not successful on occasion, the advisor for the U.S. company looking to be sold (especially a “hot” company) may seek to create an auction for the company, thus seeking to maximize the price and otherwise obtain the most favorable terms. Even if they do not succeed in doing this, they will generally seek to have the process move as rapidly as possible. Prospective buyers who are unwilling to follow an auction process when established or move too slowly are simply left behind. An important aspect in dealing with this is to be prepared. This means having done industry and market analysis in advance so as to be able to readily determine one’s interest and willingness to devote the necessary resources to explore the deal, and have ready or be able to quickly assemble a team of qualified Chinese and U.S. advisors.

Clinton calls U.N. veto on Syria a ‘travesty’

U.S. Secretary of State Clinton called the veto by Russia and China of the U.N. resolution on Syria a “travesty” as Syria’s President Bashar al-Assad attended mosque service. (Video: Reuters/Photo: Getty Images)

Many U.S. businessmen object to the alleged slow deal pace of foreign businessmen (and not just Chinese), thus often giving U.S. buyers an advantage. Timing delays are, of course, a tactic to be considered; however they should only be used as deemed appropriate, such as to express reservations or concerns so as to try and enhance one’s bargaining position. However, a buyer should not allow its perceived slowness to cost it a deal it otherwise wants.
While most people properly say “a deal is not done until it is done,” in many U.S. negotiations the same often is not true of individual issues. Once an issue is resolved, it is generally not renegotiated absent special circumstances. A party which acts contrary to this undercuts its counter-party’s trust in it.
There is great significance in the U.S. placed on the transaction contract, as each party seeks to maximize its benefits and protections. As a general rule, legal counsel for a U.S. party, will seek as much protection for its client and clarity in the terms of an agreement as possible. This can be especially important for a buyer or investor. This often means lengthy detailed contracts, and also emphasizes the need for the parties to make decisions relatively quickly with respect to the many points involved. In fact, one view is that many U.S. business persons and their lawyers will only encourage ambiguity in an agreement if they think that addressing the ambiguity in the negotiations would result in it being resolved contrary to their interests or if they think they will have greater negotiating leverage on the point once the agreement is signed or the deal is consummated.
By having a contract be as detailed and precise as possible, the likelihood of a dispute is reduced. This is augmented by the fact that in the U.S. there is a very substantial body of court rulings and laws which help determine what a particular contractual phrase will mean in a particular context, thus creating even greater potential certainty. Finally, it should be recognized that other than private arbitrators and mediators and the courts — all of which are objective but the last of which is slow — no governmental entity or person such as a governmental bureaucrat plays a meaningful role in resolving contractual disputes.
While concerns abound over the possible legal burdens that Chinese companies face in the U.S., there are many reasons for Chinese companies to go global, and in particular to do so in the United States.
Read this commentary on Caixin Online.

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Andrew Ross is partner and chair of the mergers and acquisitions practice group at Loeb & Loeb LLP. This article is an abridged version of a paper titled, “Acquisitions by Chinese companies in the United States: The case for moving forward now.”

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United Silver Corp. and Hale Capital Partners Complete Financing

VANCOUVER, BRITISH COLUMBIA–(Marketwire -02/01/12)- United Silver Corp. (“USC” or the “Company”) (TSX: USC.TO – News)(OTCQX: USCZF.PK – News) and Hale Capital Partners (“Hale” or the “Lender”) are pleased to announce that, subject to final approval from the Toronto Stock Exchange (the “TSX”), they have successfully closed their previously announced financing transaction. USC is now in a position to begin its four-year exploration and development plan to test the mineralization of the South Vein and Alhambra Vein at depth and along the east/west strike extensions of the veins.
In the financing transaction, USC issued to Hale a convertible note (the “Convertible Note”) in the principal amount of USD$6,300,000 (being the Canadian equivalent of $6,332,760.00, based on the Bank of Canada noon rate on January 31, 2012) evidencing a loan the proceeds of which were advanced by Hale pursuant to the Convertible Note and a securities purchase agreement (the “Securities Purchase Agreement”) entered into among a wholly owned subsidiary of Hale, as agent and initial purchaser, and USC. USC also issued to Hale 5,040,000 common share purchase warrants (the “Warrants”). Hale will have the right at any time to convert any or all of the principal owing under the Convertible Note into common shares (“USC Common Shares”) of USC at a conversion price of USD$0.50 (being the Canadian equivalent of $0.50, based on the Bank of Canada noon rate on January 31, 2012) per USC Common Share. In addition, Hale will have the right at any time to convert any or all of the accrued and unpaid interest that USC has elected (provided that USC has satisfied certain conditions set out in the Convertible Note) to add to the principal amount of the Convertible Note (“PIK Interest”). The conversion price with respect to PIK Interest will be an amount equal to the “market price” (as defined in the Toronto Stock Exchange Manual) on the applicable interest payment date, subject to the approval of the TSX in each instance. Each whole Warrant will entitle the holder to acquire one USC Common Share at an exercise price of US$0.42 (being the Canadian equivalent of $0.42, based on the Bank of Canada noon rate on January 31, 2012) per USC Common Share for a period of four years from the date of issuance.
If the principal amount of the Convertible Note is fully converted, Hale would hold 12,600,000 or 14.4% of the total number of issued and outstanding USC Common Shares. In the event that all of the Warrants are also exercised, Hale’s holdings would increase to 17,640,000 or 19% of the total number of issued and outstanding USC Common Shares. As the number of USC Common Shares issuable to Hale in respect of PIK Interest, if any, is contingent, in part, upon future values and share prices, the number of USC Common Shares which Hale may acquire should it exercise its conversion rights in respect thereof cannot be determined at this time.
None of the Convertible Note, the Warrants or the USC Common Shares that may be issued upon conversion or exercise, respectively, of these securities, have been registered under the United States Securities Act of 1933, as amended (the “1933 Act”), or the securities laws of any state of the United States, and may not be offered or sold in the United States absent registration or an applicable exemption therefrom under the 1933 Act and the securities laws of all applicable states.
Under the terms of the Securities Purchase Agreement, USC is required to appoint to its board a person mutually agreed upon with Hale and to permit an observer from Hale to attend its Board meetings, subject to conditions.
Hale has filed an early warning acquisition report on SEDAR. A copy of the report may be obtained by contacting Martin Hale at (212) 751-8228.
USC intends to use the net proceeds from the financing for exploration and development and working capital purposes. The loan proceeds will allow USC to continue its exploration and development drifting, bulk sampling and test mining on the South Vein. USC proposes to mill ore from the bulk sampling and test mining under a milling JV agreement with New Jersey Mining Company and to refine it under a contract with Formation Metals at its refinery located less than three miles from the mill. USC intends to use cash generated from operations, including the bulk sampling and test mining activities, to fund an extensive surface and underground drilling program to test the mineralization of the entire Crescent property and develop a property-wide mine plan without further equity raises and dilution.
Hale may or may not purchase or sell securities of the Company in the future on the open market or in private transactions, depending on market conditions and other factors material to Hale’s investment decisions and reserves the right to dispose of any or all of its securities in the open market or otherwise, at any time and from time to time and to engage in hedging or similar transactions with respect to the securities.
ABOUT UNITED SILVER CORP.
USC is a vertically integrated mining company with operations in Idaho, USA. It has earned, through development and operations, an 80% interest in the Crescent Silver Mine project in Idaho’s prolific Silver Belt – directly between two of the world’s historically largest silver producing properties, the Sunshine and Bunker Hill mines. USC also offers a full suite of mining services including contract mining and mine machine repair and fabrication services to silver miners in the district. USC’s common shares trade on the Toronto Stock Exchange under the symbol “USC”. For more information about USC, please visit: www.unitedsilvercorp.com.
ABOUT HALE CAPITAL PARTNERS
Based in New York City, Hale Capital Partners has established itself as a leading private equity firm focused on strategic investments in public companies and their subsidiaries. Hale Capital Partners’ team is comprised of seasoned private equity veterans and entrepreneurs, who bring not only deep domain expertise but also hands-on operating experience to help build highly successful companies. Hale Capital Partners’ mining portfolio spans all stages of mine development from exploration to commercial production.
Hale’s contact information is as follows:

Hale Capital Partners, L.P.
570 Lexington Avenue, 49th Floor
New York, NY 10022
Attn: Martin Hale, CEO and Portfolio Manager

ON BEHALF OF UNITED SILVER CORP.
Graham Clark, Chairman and Interim CEO
FORWARD-LOOKING STATEMENTS: This press release contains forward-looking statements, which address future events and conditions, which are subject to various risks and uncertainties. Forward-looking statements in this press release include statements about USC’s intended use of the net proceeds and that they will enable USC to continue its exploration and development activities, its proposal to mill ore under a milling agreement with New Jersey Mining Company and refine it under a contract with Formation Metals, its intent to use cash from operations to fund an extensive surface and underground drilling program and that it can develop a property-wide mine plan without further equity raises and dilution. These forward-looking statements are based on the expectations and opinions of the Company’s management on the date the statements are made. The assumptions used in the preparation of such statements, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. These assumptions include management’s assumption that the net proceeds of the financing, together with revenue from operations, will generate sufficient cash flow to fund the budget and that the price for metals will continue to make the Company’s activities economically feasible. Actual results may differ materially from those currently anticipated due to a number of factors beyond the Company’s control. These risks and uncertainties include the risks inherent in the Company’s activities and the risks identified in the Company’s periodic disclosure filings on the SEDAR website maintained by the Canadian Securities Administrators. The Company expressly disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
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Covance Reports Fourth Quarter Revenue of $532M, GAAP EPS of $0.35, Pro Forma EPS of $0.73, and Adjusted Net Orders of …

PRINCETON, N.J., Jan. 25, 2012 /PRNewswire/ — Covance Inc. (NYSE: CVD – News) today reported GAAP earnings for its fourth quarter ended December 31, 2011 of $0.35 per diluted share.  Included in fourth quarter results is approximately $0.41 per diluted share in charges, approximately $0.10 of which relates to the completion of the previously-announced restructuring actions, approximately $0.11 of which relates to the termination of a research products inventory supply agreement and inventory write down, and approximately $0.20 for the impairment of a related equity investment, partially offset by a gain of approximately $0.03 from favorable income tax developments in the quarter.  Excluding these items, diluted earnings per share for the fourth quarter ended December 31, 2011 was $0.73.  For the full year, diluted earnings per share were $2.16 inclusive of $0.58 per share in charges, partially offset by a gain of approximately $0.04 from favorable income tax developments during the year.  Excluding these items, diluted earnings per share for the year ended December 31, 2011 was $2.70.
“During 2011, Covance increased revenue by 8.8% to $2.1 billion, improved pro forma operating margin by 70 basis points (when excluding charges in both periods), and drove pro forma EPS growth of 26% to $2.70 per diluted share. In addition, adjusted net orders for the year were a record $2.53 billion, a year-on-year increase of 13.5%, resulting in a strong adjusted net book-to-bill of 1.21 to 1 for the year,” said Joe Herring, Chairman and Chief Executive Officer.  ”For the fourth quarter, consolidated revenues grew 8.3% and pro forma operating margin expanded by 130 basis points year-on-year and 50 basis points sequentially to 10.9%.
“In Early Development, fourth quarter net revenues grew 6.3% year-on-year, but declined $5.7 million sequentially due to lower demand in research products and European toxicology services, as well as a $2.3 million foreign exchange headwind.  Early Development pro forma operating margin (when excluding charges in all periods), increased 190 basis points year-on-year to 13.9%, but did not expand sequentially as we had forecasted due primarily to operating losses incurred in research products this quarter.  This lower demand for our research products caused us to reassess inventory levels and the fair value of an equity investment in a supplier.  In Late-Stage Development, net revenues grew 10.0% year-on-year driven by the continued strong performance in our clinical development services. Pro forma operating margin of 20.0% exceeded our expectations due to increased profitability in our central laboratory, which grew revenues sequentially on a constant currency basis for the second consecutive quarter.
“On the commercial front, adjusted net orders in the fourth quarter were a record $759 million, representing an adjusted book-to-bill of 1.42 to 1.  We were particularly pleased to see continued strong orders in clinical development and a further increase in orders in our central laboratory for the second consecutive quarter.  The ongoing strength of our service portfolio, as evidenced by our strong 2011 orders, gives us confidence to continue our investments to drive future growth.
“Looking ahead, we are making strategic investments in our information technology infrastructure and applications to increase the productivity of our drug development services, drive operating efficiencies, and arrest the long-term rate of growth of our information technology spending.  In addition to the implementation of our central laboratory system, which we previously disclosed as a $10 million incremental spend, we are funding three additional strategic projects to help us achieve these objectives. In total, these four projects will increase our IT capital expenditures to approximately $90 million in 2012 (versus approximately $60 million in 2011), and will lead to a significant increase in operating expense over the next two years.  We are also planning to continue expanding our commercial footprint in order to capture an increasing share of the opportunities available in the CRO industry and position us for longer-term growth.  In aggregate, we are projecting spending in these areas to be above the growth rate in revenue by approximately $25 million, or $0.32 per diluted share in 2012.
“In the first quarter of 2012, we expect a modest increase in net revenues from the fourth quarter level as we forecast a further sequential decline in Early Development net revenue, to be offset by an increase in Late-Stage net revenues.  A drop in Early Development earnings due to the expected lower level of revenue, when combined with the increased information technology spending and foreign exchange headwind, is expected to result in diluted earnings per share in the low $0.60 range.
“For the full year, we are forecasting mid-single digit year-on-year revenue growth (inclusive of an approximate 200 basis point headwind from the stronger USD) and diluted earnings per share in the range of $2.50 to $2.80.  This diluted earnings per share range reflects increased investment in IT and commercial, the estimated impact of anticipated share repurchases that may be made under our Board-approved share repurchase programs ($0.15 to $0.20 per share), excludes potential new strategic alliances with clients, and assumes foreign exchange rates remain at year-end 2011 levels.”
Consolidated Results

($ in millions except EPS)	4Q11	4Q10	Change	FY 2011	FY 2010	Change
Total Revenues	$582.4	$519.5		$2,236.4	$2,038.5
Less: Reimbursable Out-of-Pockets	$49.9	$28.0		$140.5	$112.9
Net Revenues	$532.5	$491.5	8.3%	$2,095.9	$1,925.6	8.8%
Operating Income	$39.0	$28.9	35.0%	$180.6	$47.5	280.3%
Net Income	$21.1	$28.4	(25.5%)	$132.2	$68.3	93.7%
Earnings Per Share	$0.35	$0.45	(23.6%)	$2.16	$1.06	104.3%
2011 Charges*	($31.1)	-		($46.8)	-
2010 Charges*	-	($18.4)		-	($137.6)
Favorable Income Tax items*	$1.8	$6.9		$2.5	$17.3
Operating Income, excluding items*	$57.9	$47.2	22.6%	$215.3	$185.1	16.3%
Operating Margin %, ex items*	10.9%	9.6%		10.3%	9.6%
Net Income, excluding items*	$44.6	$35.1	26.9%	$165.0	$138.6	19.1%
Diluted EPS, excluding items*	$0.73	$0.56	30.4%	$2.70	$2.15	25.7%

* See attached pro forma income statements for reconciliation of GAAP to pro forma amounts.
Operating Segment Results
Early Development

($ in millions)	4Q11	4Q10	Change	FY 2011	FY 2010	Change
Net Revenues	$234.5	$220.6	6.3%	$930.6	$840.3	10.7%
GAAP Operating Income (Loss)	$17.7	$21.1	(16.3%)	$105.3	($32.0)	-
GAAP Operating Margin %	7.5%	9.6%		11.3%	(3.8%)
2011 Charges	($15.0)	-		($21.7)	-
2010 Charges	-	($5.4)		-	($124.6)
2010 Cost Actions	-	-		-	($8.0)
Pro Forma Operating Income	$32.6	$26.6	22.8%	$127.0	$100.7	26.1%
Pro Forma OM%	13.9%	12.0%		13.7%	12.0%

The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products.  Net revenues in the fourth quarter of 2011 grew 6.3% year-on-year to $234.5 million, driven by the results from our new Alnwick, UK and Porcheville, France sites and clinical pharmacology. On a sequential basis, revenues declined $5.7 million due to lower demand in research products and European toxicology services, as well as a $2.3 million foreign exchange headwind. North American toxicology experienced modest year-on-year growth and was flat sequentially.
GAAP operating income for the fourth quarter of 2011 was $17.7 million, and included $4.7 million in charges relating to our previously announced restructuring activities as well as $10.3 million in charges associated with lower demand for our research products (costs to terminate a product supply agreement and inventory write-down).  Pro forma operating income, excluding charges in all periods, was $32.6 million in the current quarter, compared to $35.0 million last quarter and $26.6 million in the fourth quarter of last year.  The primary driver of the sequential decline in pro forma operating income was the loss we incurred in our research products operation from lower demand, as previously discussed.  Pro forma operating margins, excluding charges in all periods, were 13.9% for the fourth quarter, compared to 14.6% last quarter and 12.0% in the fourth quarter of 2010.
Late-Stage Development

($ in millions)	4Q11	4Q10	Change	FY 2011	FY 2010	Change
Net Revenues	$298.0	$270.9	10.0%	$1,165.4	$1,085.3	7.4%
GAAP Operating Income	$ 58.2	$47.6	22.3%	$226.3	$225.5	0.4%
GAAP Operating Margin %	19.5%	17.6%		19.4%	20.8%
2011 Charges	($1.3)	-		($5.0)	-
2010 Charges	-	($7.1)		-	($7.1)
2010 Cost Actions	-	-		-	($0.2)
Pro Forma Operating Income	$59.5	$ 54.7	8.7%	$231.3	$232.8	(0.7%)
Pro Forma OM%	20.0%	20.2%		19.8%	21.5%

The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services.  Net revenues for the fourth quarter of 2011 grew 10.0% year-on-year to $298.0 million, primarily driven by the continued strong performance in clinical development and a 190 basis point tailwind in foreign exchange.  On a sequential basis, revenues declined $5.0 million due to a $10.1 million foreign exchange headwind, which more than offset growth across the segment’s service offerings, at constant exchange rates.
GAAP operating income for the fourth quarter was $58.2 million and included $1.3 million in costs associated with our restructuring actions. Pro forma operating income, excluding these costs, was $59.5 million, compared to $58.4 million last quarter and $54.7 million in the fourth quarter of the prior year. Pro forma operating margins, excluding these costs, were 20.0% for the fourth quarter of 2011 compared to 19.3% last quarter and 20.2% in the fourth quarter of last year. The sequential increase in profitability was primarily due to stronger central laboratory performance.
Corporate Information
The Company’s backlog at December 31, 2011 was $6.14 billion compared to $6.08 billion at September 30, 2011 and $6.19 billion at December 31, 2010. Foreign exchange negatively impacted sequential backlog growth by $75 million.
Corporate expenses totaled $37.0 million in the fourth quarter of 2011 (including $2.7 million in restructuring costs) compared to $38.4 million last quarter (including $1.4 million in restructuring costs) and $39.9 million in the fourth quarter of last year.
During the fourth quarter, the company recorded a $12.1 million charge to recognize an impairment in the carrying value of an equity investment in a supplier of research products.  This charge is reflected as a component of other income (expense) in the consolidated statements of income.
Cash and cash equivalents at December 31, 2011 were $389 million compared to $400 million at September 30, 2011 and $377 million at December 31, 2010.  Covance repaid $60 million in debt during the quarter and now has $30.0 million in debt outstanding, originating from borrowings related to the fourth quarter 2010 accelerated share repurchase.
Free cash flow (defined as operating cash flow less capital expenditures) for the fourth quarter of 2011 was $54 million, consisting of operating cash flow of $102 million less capital expenditures of $48 million.  Free cash flow for the full year was $109 million, consisting of operating cash flow of $243 million less capital expenditures of $135 million. We expect 2012 capital spending to be approximately $180 million.
Net Days Sales Outstanding (DSO) were 38 days at December 31, 2011 compared to 38 days at September 30, 2011 and 31 days at December 31, 2010.
The Company’s investor conference call will be webcast on January 26 at 9:00 am ET. Management’s commentary and presentation slides will be available through www.covance.com.
Covance, with headquarters in Princeton, New Jersey, is one of the world’s largest and most comprehensive drug development services companies with annual revenues greater than $2 billion, global operations in more than 30 countries, and more than 11,000 employees worldwide.  Information on Covance’s products and services, recent press releases, and SEC filings can be obtained through its website at www.covance.com.
Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company’s business are based largely on management’s expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.  These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company’s ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss or delay of large studies, risks associated with acquisitions and investments, the Company’s ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, testing mix and geographic mix of kit receipts in central laboratories,  fluctuations in currency exchange rates, the price and rate at which the company executes its share repurchase program, the cost and pace of completion of our information technology projects and the realization of benefits therefrom, and other factors described in the Company’s filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.  The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company’s expectations.
Financial Exhibits Follow

COVANCE INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2011 AND 2010
(Dollars in thousands, except per share data)
		Three Months Ended December 31				Years Ended December 31
		2011		2010		2011		2010
		(UNAUDITED)
Net revenues		$    532,478		$    491,513		$ 2,095,938		$ 1,925,630
Reimbursable out-of-pocket expenses		49,907		27,942		140,508		112,843
Total revenues		582,385		519,455		2,236,446		2,038,473
Costs and expenses:
Cost of revenue		371,852		346,924		1,467,051		1,348,498
Reimbursable out-of-pocket expenses		49,907		27,942		140,508		112,843
Selling, general and administrative		95,752		89,810		343,044		307,386
Depreciation and amortization		25,923		25,919		105,214		103,024
Asset impairment charges		-		-		-		119,229
Total costs and expenses		543,434	(a)	490,595	(d)	2,055,817	(c)	1,990,980	(e)
Income from operations		38,951	(a)	28,860	(d)	180,629	(c)	47,493	(e)
Other expense, net:
Interest expense, net		339		430		1,979		52
Foreign exchange transaction loss, net		356		1,054		1,248		3,649
Impairment of equity investment		12,119		-		12,119		-
Other expense, net		12,814	(b)	1,484		15,346	(b)	3,701
Income before taxes and equity investee earnings		26,137	(a),(b)	27,376	(d)	165,283	(b),(c)	43,792	(e)
Tax expense (benefit)		5,172	(a),(b)	(1,121)	(d)	33,574	(b),(c)	(23,655)	(e)
Equity investee earnings (loss)		175		(119)		480		807
Net income		$      21,140	(a),(b)	$      28,378	(d)	$    132,189	(b),(c)	$      68,254	(e)
Basic earnings per share		$          0.35	(a),(b)	$          0.46	(d)	$          2.22	(b),(c)	$          1.08	(e)
Weighted average shares outstanding – basic		59,730,270		61,390,965		59,629,788		63,043,561
Diluted earnings per share		$          0.35	(a),(b)	$          0.45	(d)	$          2.16	(b),(c)	$          1.06	(e)
Weighted average shares outstanding – diluted		61,080,387		62,703,690		61,091,354		64,472,326
(a) Includes, as applicable, $8,667 in restructuring costs ($5,961 net of tax), $10,287 in costs associated with the termination of an inventory supply agreement and related inventory write-down ($7,130 net of tax) and favorable income tax items totaling $1,769 during the three months ended December, 2011.
(b) Includes $12,119 impairment of equity investment ($12,119 net of tax) during the three and twelve months ended December 31, 2011.
(c) Includes, as applicable, $24,369 in restructuring costs ($16,067 net of tax), $10,287 in costs associated with the termination of an inventory supply agreement and related inventory write-down ($7,130 net of tax) and favorable income tax items totaling $2,469 during the year ended December 31, 2011.
(d) Includes, as applicable, $18,362 in restructuring costs ($13,688 net of tax) and $6,946 in favorable income tax items during the three months ended December 31, 2010.
(e) Includes, as applicable, asset impairment charges ($119,229) and restructuring costs ($18,362) totaling $137,591 ($87,610 net of tax) and favorable income tax items totaling $17,298 during the year ended December 31, 2010.
Excluding the impact of restructuring charges, inventory write-down and related charges, the asset impairment charges, the impairment of equity investment and favorable income tax items:
Income from operations		$      57,905		$      47,222		$    215,285		$    185,084
Taxes on income		$      12,804		$      10,499		$      47,502		$      43,624
Net income		$      44,581		$      35,120		$    165,036		$    138,566
Basic earnings per share		$          0.75		$          0.57		$          2.77		$          2.20
Diluted earnings per share		$          0.73		$          0.56		$          2.70		$          2.15

COVANCE INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 and DECEMBER 31, 2010
(Dollars in thousands)
			December 31		December 31
			2011		2010
ASSETS
Current Assets:
	Cash & cash equivalents		$       389,103		$       377,223
	Accounts receivable, net		312,127		261,160
	Unbilled services		114,095		90,729
	Inventory		74,698		82,924
	Deferred income taxes		52,078		35,648
	Prepaid expenses and other current assets		144,809		98,127
	Total Current Assets		1,086,910		945,811
Property and equipment, net			849,551		843,983
Goodwill, net			127,779		127,653
Other assets			43,768		48,095
	Total Assets		$    2,108,008		$    1,965,542
LIABILITIES and STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$         36,393		$         34,079
	Accrued payroll and benefits		142,229		107,572
	Accrued expenses and other current liabilities		119,308		97,395
	Unearned revenue		202,210		186,301
	Short-term debt and current portion of long-term debt		30,000		45,000
	Income taxes payable		6,889		28,827
	Total Current Liabilities		537,029		499,174
Long-term debt			-		87,500
Deferred income taxes			42,295		30,531
Other liabilities			70,889		68,516
	Total Liabilities		650,213		685,721
Stockholders’ Equity:
	Common stock		781		774
	Paid-in capital		689,584		639,341
	Retained earnings		1,505,894		1,373,705
	Accumulated other comprehensive income		4,622		277
	Treasury stock		(743,086)		(734,276)
	Total Stockholders’ Equity		1,457,795		1,279,821
	Total Liabilities and Stockholders’  Equity		$    2,108,008		$    1,965,542

COVANCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Dollars in thousands)
		Years Ended December 31
		2011		2010
Cash flows from operating activities:
Net income		$ 132,189		$   68,254
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		105,214		103,024
Asset impairment charges		-		119,229
Non-cash compensation expense associated with employee benefit
and stock compensation plans		40,057		32,289
Deferred income tax benefit		(6,128)		(71,661)
Impairment of equity investment		12,119		-
Loss on disposal of property and equipment		1,618		1,487
Equity investee earnings		(480)		(807)
Changes in operating assets and liabilities, net of businesses
acquired:
Accounts receivable		(50,754)		23,959
Unbilled services		(23,366)		6,550
Inventory		8,226		(1,998)
Accounts payable		2,297		(2,755)
Accrued liabilities		56,409		20,097
Unearned revenue		15,909		19,411
Income taxes payable		(21,070)		14,797
Other assets and liabilities, net		(28,762)		2,547
Net cash provided by operating activities		243,478		334,423
Cash flows from investing activities:
Capital expenditures		(134,633)		(126,278)
Acquisition of businesses, net of cash acquired		(411)		(20,994)
Other, net		192		47
Net cash used in investing activities		(134,852)		(147,225)
Cash flows from financing activities:
Net (repayments) borrowings under revolving credit facility		(5,000)		35,000
Borrowings under long-term debt		-		100,000
Repayments under long-term debt		(97,500)		(2,500)
Stock issued under employee stock purchase and option plans		9,325		18,825
Purchase of treasury stock		(8,810)		(256,351)
Net cash used in financing activities		(101,985)		(105,026)
Effect of exchange rate changes on cash		5,239		5,582
Net change in cash and cash equivalents		11,880		87,754
Cash and cash equivalents, beginning of period		377,223		289,469
Cash and cash equivalents, end of period		$ 389,103		$ 377,223

COVANCE INC.
GAAP to Pro Forma Reconciliation
Q4 2011
(Dollars in thousands, except per share data)
(UNAUDITED)
			Adjustments
	GAAP		Restructuring Activities (1)		Other Charges (2)		Income Tax Items (3)		Pro Forma
Net revenues	$    532,478								$    532,478
Reimbursable out-of-pocket expenses	49,907								49,907
Total revenues	582,385		-		-		-		582,385
Costs and expenses:
Cost of revenue	371,852								371,852
Reimbursable out-of-pocket expenses	49,907								49,907
Selling, general and administrative	95,752		(8,754)		(10,287)				76,711
Depreciation and amortization	25,923		87						26,010
Total costs and expenses	543,434		(8,667)		(10,287)		-		524,480
Income from operations	38,951		8,667		10,287		-		57,905
Other expense (income), net:
Interest expense (income), net	339								339
Foreign exchange transaction loss, net	356								356
Impairment of equity investment	12,119				(12,119)				-
Other expense (income), net	12,814		-		(12,119)		-		695
Income before taxes and equity investee earnings	26,137		8,667		22,406		-		57,210
Tax expense	5,172		2,706		3,157		1,769		12,804
Equity investee earnings	175								175
Net income	$      21,140		$              5,961		$      19,249		$                   (1,769)		$      44,581
Basic earnings per share	$          0.35		$                0.10		$          0.32		$                     (0.03)		$          0.75
Weighted average shares outstanding – basic	59,730,270		59,730,270		59,730,270		59,730,270		59,730,270
Diluted earnings per share	$          0.35		$                0.10		$          0.32		$                     (0.03)		$          0.73
Weighted average shares outstanding – diluted	61,080,387		61,080,387		61,080,387		61,080,387		61,080,387
(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.
(2) Represents costs incurred in connection with termination of an inventory supply agreement and related inventory write-down and an impairment of a related equity investment.
(3) Represents favorable resolutions of income tax matters.

COVANCE INC.
GAAP to Pro Forma Reconciliation
Q4 2010
(Dollars in thousands, except per share data)
(UNAUDITED)
			Adjustments
	GAAP		Restructuring Activities (1)		Income Tax Items (2)		Pro Forma
Net revenues	$    491,513						$    491,513
Reimbursable out-of-pocket expenses	27,942						27,942
Total revenues	519,455		-		-		519,455
Costs and expenses:
Cost of revenue	346,924						346,924
Reimbursable out-of-pocket expenses	27,942						27,942
Selling, general and administrative	89,810		(18,092)				71,718
Depreciation and amortization	25,919		(270)				25,649
Total costs and expenses	490,595		(18,362)		-		472,233
Income from operations	28,860		18,362		-		47,222
Other expense (income), net:
Interest expense (income), net	430						430
Foreign exchange transaction loss, net	1,054						1,054
Other expense (income), net	1,484		-		-		1,484
Income before taxes and equity investee earnings	27,376		18,362		-		45,738
Tax (benefit) expense	(1,121)		4,674		6,946		10,499
Equity investee (loss) earnings	(119)						(119)
Net income	$      28,378		$           13,688		$       (6,946)		$      35,120
Basic earnings per share	$          0.46		$               0.22		$         (0.11)		$          0.57
Weighted average shares outstanding – basic	61,390,965		61,390,965		61,390,965		61,390,965
Diluted earnings per share	$          0.45		$               0.22		$         (0.11)		$          0.56
Weighted average shares outstanding – diluted	62,703,690		62,703,690		62,703,690		62,703,690
(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.
(2) Represents favorable resolutions of income tax matters.

COVANCE INC.
GAAP to Pro Forma Reconciliation
For the year ended December 31, 2011
(Dollars in thousands, except per share data)
(UNAUDITED)
			Adjustments
	GAAP		Restructuring Activities (1)		Other Charges (2)		Income Tax Items (3)		Pro Forma
Net revenues	$ 2,095,938								$ 2,095,938
Reimbursable out-of-pocket expenses	140,508								140,508
Total revenues	2,236,446		-		-		-		2,236,446
Costs and expenses:
Cost of revenue	1,467,051								1,467,051
Reimbursable out-of-pocket expenses	140,508								140,508
Selling, general and administrative	343,044		(22,592)		(10,287)				310,165
Depreciation and amortization	105,214		(1,777)						103,437
Total costs and expenses	2,055,817		(24,369)		(10,287)		-		2,021,161
Income from operations	180,629		24,369		10,287		-		215,285
Other expense (income), net:
Interest expense (income), net	1,979								1,979
Foreign exchange transaction loss, net	1,248								1,248
Impairment of equity investment	12,119				(12,119)				-
Other expense (income), net	15,346		-		(12,119)		-		3,227
Income before taxes and equity investee earnings	165,283		24,369		22,406		-		212,058
Tax expense	33,574		8,302		3,157		2,469		47,502
Equity investee earnings	480								480
Net income	$    132,189		$            16,067		$      19,249		$                   (2,469)		$    165,036
Basic earnings per share	$          2.22		$                0.27		$          0.32		$                     (0.04)		$          2.77
Weighted average shares outstanding – basic	59,629,788		59,629,788		59,629,788		59,629,788		59,629,788
Diluted earnings per share	$          2.16		$                0.26		$          0.32		$                     (0.04)		$          2.70
Weighted average shares outstanding – diluted	61,091,354		61,091,354		61,091,354		61,091,354		61,091,354
(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.
(2) Represents costs incurred in connection with termination of an inventory supply agreement and related inventory write-down and  an impairment of a related equity investment.
(3) Represents favorable resolutions of income tax matters.

COVANCE INC.
GAAP to Pro Forma Reconciliation
For the year ended December 31, 2010
(Dollars in thousands, except per share data)
(UNAUDITED)
			Adjustments
	GAAP		Asset Impairment and Restructuring Activities (1)		Income Tax Items (2)		Pro Forma
Net revenues	$ 1,925,630						$ 1,925,630
Reimbursable out-of-pocket expenses	112,843						112,843
Total revenues	2,038,473		-		-		2,038,473
Costs and expenses:
Cost of revenue	1,348,498						1,348,498
Reimbursable out-of-pocket expenses	112,843						112,843
Selling, general and administrative	307,386		(18,092)				289,294
Depreciation and amortization	103,024		(270)				102,754
Asset impairment charges	119,229		(119,229)				-
Total costs and expenses	1,990,980		(137,591)		-		1,853,389
Income from operations	47,493		137,591		-		185,084
Other expense (income), net:
Interest expense (income), net	52						52
Foreign exchange transaction loss, net	3,649						3,649
Other expense (income), net	3,701		-		-		3,701
Income before taxes and equity investee earnings	43,792		137,591		-		181,383
Tax (benefit) expense	(23,655)		49,981		17,298		43,624
Equity investee earnings	807						807
Net income	$      68,254		$                   87,610		$     (17,298)		$    138,566
Basic earnings per share	$          1.08		$                       1.39		$         (0.27)		$          2.20
Weighted average shares outstanding – basic	63,043,561		63,043,561		63,043,561		63,043,561
Diluted earnings per share	$          1.06		$                       1.36		$         (0.27)		$          2.15
Weighted average shares outstanding – diluted	64,472,326		64,472,326		64,472,326		64,472,326
(1) Represents asset impairment charges totaling $119,229 and restructuring costs totaling $18,362 incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.
(2) Represents favorable resolutions of income tax matters.

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