Greetings and welcome to the CBRE’s Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Kristyn Farahmand, Senior Vice President of Investor Relations and Strategic Finance. Thank you, you may begin.

Good morning, everyone and welcome to CBRE’s third quarter 2021 earnings conference call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks, as well as an excel file that contains additional supplemental materials. Please note, we have added some new details to our real estate investment segment tab. Before we kickoff today’s call, I will remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE’s future growth prospects, including 2021 qualitative outlook and multiyear growth framework, operations, market share, capital deployment strategy, and share repurchases, M&A and investment activity, financial performance including profitability, expenses, margins, adjusted EPS and the effects of both cost savings initiatives and the COVID pandemic, the integration and performance of acquisitions and other transactions and any other statements regarding matters that are not historical facts. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning’s earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q respectively. We have provided reconciliations of adjusted EPS, adjusted EBITDA, net revenue, and certain other non-GAAP financial measures included in our remarks…

Thank you, Kristyn, and good morning, everyone. The diversification of our business across four dimensions, asset types, business lines, clients and geographic markets has been a key focus of our past few earnings calls. The benefits of this diversification were clearly evident in our third quarter performance, with adjusted EBITDA more than 60% above the Q3 2019 peak, record Q3 margins and strong top-line growth across all global regions. Our leaders around the world have been adept at identifying and securing compelling opportunities to grow our business across the four dimensions of diversification. We have committed approximately $2 billion of capital already this year to secularly favored areas including green energy and infrastructure project management, with our Turner & Townsend investment, Flex office solutions with our industry investment and logistics and multifamily assets in a real estate investment segment. These investments position as well to make additional capital and organic investments that will drive earnings growth for years to come. We're also making substantial investments to grow our business organically. These include deeper asset type specialization in both our brokerage and real estate investment management businesses, and client sector specialization in our GWS business. And we're expanding our real estate development business into new international markets. With our strong balance sheet and cash flow generation, as well as the work we've done to streamline costs and capture the benefits of scale, we are positioned to continue growth initiatives like these well into the future. At the same time, we are committed to returning cash to our shareholders and are evaluating all potential avenues for such returns. I will close by noting that we will update our multi-year growth framework when we report Q4 results in February. Now I'll hand the call over to Emma.

Thanks, Bob, and good morning, everyone. Turning to Slide 8, let's start with our advisory segment. This segment rebounded strongly from the pandemic's depressed levels of Q3 2020 and performed very well compared with pre-pandemic activity in 2019. In my comments today I will include compared with Q3 2019 for the transactional business lines. We believe this is the best barometer of how these business lines are faring. Advisory services net revenue and operating profits set new third quarter records, surpassing the Q3 2019 peak by 13% and 29%, respectively. This strong performance reflects not only our ability to capture reviving demand for real estate services, but also our diligent focus on managing costs during the recovery. The strong operating profit growth also reflects a $7.5 million gain from our industrious investment. Leasing continued to bounce back strongly, particularly outside of the U.S. with global revenue up 58% from Q3 2020 and 7% from the Q3 2019 peak. All three regions generated leasing revenue above Q3 2019 peak levels, up 4% in the Americas, 20% in EMIA and 11% in APAC. Office demand in the U.S. continues to trail pre-pandemic levels. However, the shortfalls from the 2019 peak levels narrowed to just 16% in Q3 versus 54% in q2. We also continued to see strong small deal performance with revenue from U.S. leasing transactions below $1 million, up about 8% versus Q3 2019. While the contribution from large deals over $1 million remained about 5% below its pre-pandemic level. Property sales activity remained robust. All regions exceeded their pre-pandemic peaks with global property sales up 93% from Q3 2020 and 27% from the Q3 2019 peak. Like in leasing, U.S. office sales activity saw significant improvement coming in just 16% below Q3 2019 levels versus 31% in Q2, and improved…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Andrew Rosivach with Wolfe Research. Please proceed with your question.

Hey, everybody, thanks for taking my call. And congrats again for an amazing quarter. One, just really small housekeeping question. You had an increase in stock compensation expense in the quarter. Is that something that's just contractual that's just related to the stock being up 70% this year and the performance that you've had?

So yes, we've put in place $100 million buyback this quarter, but going forward buybacks will be a part of our capital allocation strategy. And we're going to balance it with the remainder of our -- of how we look at we allocate our capital across M&A and organic investments, but it is a part of a programmatic buyback.

And then, hey, Andrew, this is Kristyn, just to jump in for a moment. You're right. The increase in stock compensation expense is basically purely a result of the fact that the financial performance has been so robust.

Got it. So if it were going to -- the only reason why we repeat again in 2022 would be again if CBRE had outstanding performance.

Yes.

Great. Thanks a lot.

Thank you. Our next question is coming from the line of Anthony Paolone with JPMorgan. Please proceed with your question.

Okay, thanks. Good morning. My first question regards inflation and was wondering if you can comment on just the overall effect on the business and whether that brings some costs that you had caught last year back a little bit sooner. And then, the second part of the inflation question for me relates to GWS and whether there's a material impact on things like maybe incentive contracts, where you may begin to earn money if you saved the client, certain costs, but maybe that's harder now because of inflation.

Yes, absolutely. So I think I'll comment overall on our business, we feel very comfortable that we're well positioned to weather inflationary pressures across our business. I did mention in my remarks that we see a natural hedge within our GWS contracts overall and then we also see a natural hedge in other parts of our business with property management, for example. So within property management, as rents rise, as inflation rises, our revenue in property management also rises. And then, on the transactional side of the business, it tends to benefit from inflation. Given that inflation tends to only happen when the economy is expanding, so across all those businesses, we feel very comfortable that we can weather the inflationary environment. And I will note that the one business that we are monitoring and focused on is our development business. And but what we've seen so far is that the very strong valuations in that business have more than offset any inflationary pressures.

Okay. And then, on the leasing side, it sounds like office is improving, but still below prior peaks, can you give us a sense as to what that order of magnitude is right now, or perhaps even what the leasing revenue for you all in dollars would be if office got back to normal?

So I don't think we're prepared to throw out a specific number right now. But we feel really good about the leasing trajectory so far during October for the U.S.

Okay. But as compared to say prior peaks, this is off like 5% or 30%, or just any order of magnitude?

So, we haven't been more specific than to talk specifically just about U.S. leasing overall. We haven't drilled down into property type, and I don't think we want to get that granular right now. But we did identify the fact that U.S. leasing so far is actually trending above the prior 2019 peaks so far in the month of October.

Okay. And then, last question, in REI, you laid out the expected growth between investment management and development. Just wondering, I think, when you have your supplemental disclosure, you show also like an overhead, I guess amount in Hana kind of losses, is there, a piece of that we should think about as well to net into sort of those brackets.

We expect those Hana losses to continue to decline, we've transferred that business over to industrious, and we're still holding some leases, but the occupancy in those leases continues to increase. So as that increases those losses to decline over the next year.

Okay. But if I just thinking about the REI segment in totality, if I just do the up 30% that you laid out, and then the triple on development that gets us to about $548 million for the year, do we have to net some amount of overhead against that for that segment operating profit, or is that the number?

No, you would have to net some overhead against that in some minor continuing Hana losses. We didn't specifically guide to that number. But I think you can probably look at the last few quarters to get an idea.

Thank you. Our next question is coming from the line of Steve Sakwa with Evercore. Please proceed with your question.

Yes. Thanks. Good morning, Bob or Emma, was just curious if you could maybe share your thoughts on just office in general and the commentary and comments you're having with seniors about bringing people back to the office, how they're using work, hybrid work, what that means for the office long-term and just sort of how that dovetails in with your industrious investment?

Well, that's a complex question, Steve. The industrious investment, we believe is a bit of a hedge against -- not even a bit a significant hedge against what we've said now for some time is that we expect there to be some downward pressure on the office product type relative to where it has been historically. But we've studied this flex dynamic over and over and over and spent a huge amount of time with our occupier clients. And the general view is that they expect flex space to be a bigger portion of their office space used going forward than it has been historically and landlords are expected to be a fixture in their buildings in general going forward. So we think the future for industrious is quite bright. We voted with our pocketbook as they stay when we invested in that business and we're prepared to make an incremental investments to support their growth. We're quite bullish about what might happen with industrious. As it relates to the Office product type in general, I think our company and our own plans about what to do with our people is a bit of a proxy for what's going on in the marketplace. There's uncertainty we had thought we would have a significant return to the office kind of inflection point after Labor Day, because people were more and more aimed at getting their teams back into the office for all the reasons we know, collaboration, culture et cetera. When the Delta variant came, it pushed that back, we now think that inflection point is probably going to be the first of the year. And we think people will come back to the office in the same way they would have come back to the office had the Delta variant…

Great, thanks. And then maybe a question for Emma. I just wanted to circle back on the buybacks because, I think you did ramp up activity and in the third quarter. And I think either in the last call or the call before you guys had talked about maybe having a bit more of a programmatic share buyback program. And given that your leverage is below zero, I mean, is that something we should be thinking about that $100 million is being a bit of a placeholder for buybacks.

So we're at the point right now, where we're obviously in a very positive net cash position at 0.3 turns. We've generated a record amount of free cash flow over the last 12 months. So we're very happy with our balance sheet position and our free cash flow generation. And we're really taking the time to reassess what our capital allocation strategy is and how we're going to return cash to shareholders. And so we think we're in a really strong position, we're still very focused on looking for avenues to invest in our company, both organically and through M&A where we can drive growth and resiliency. And we're going to do some more work around how we balance that with cash return to shareholders and so I'm not yet ready to speak about it more specifically. But as we continue to evolve our thinking, we'll be sure to be transparent with all of you.

Thank you. [Operator Instructions] Our next question is coming from the line of Stephen Sheldon with William Blair. Please proceed with your questions.

Hey, good morning. Thanks. It sounds like you've seen a pretty big sequential step up in the GWS pipeline, but what's driving the slightly lower growth outlook for GWS now in 2021, I think mid-to-high single digits, now I think you talked about high single digits previously, and how big of an issue are labor challenges in that business and your ability to staff and I guess launch new contracts?

I don't think labor challenges are causing problems in terms of launching new contracts. They are causing some challenges in terms of staffing, we and our clients are like everybody else. There's a real war for talent and it's impacting the things we do. What you're seeing on the rebuild of the pipeline and slightly relative downward pressure we've seen on the growth trajectory of the enterprise portion of our outsourcing business is that people have found it difficult to make decisions not knowing what's going to go on with office space. And they found it difficult to make decisions because they aren't in the office together coordinating all the things you need to coordinate to make massive commitments, the way outsourcing contracts require you to make to move forward at the pace we're moving forward before. These commitments that these occupiers are making on these outsourcing contracts can be multi-billion-dollar commitments over years. And so when the teams that are dealing with the strategy and the procurement teams and the C suite aren't in the office interfacing with each other aren't certain about where they're going to go, things slow down. Now we're seeing a market increased -- a significant increase in our pipeline from where we were a year ago, which is indicative of the fact that people are getting back to being able to make these decisions with a little more clarity. But that's really what you're seeing in terms of the pipeline where it was year ago, where it was two years ago and where it is now.

Got it. Makes sense. And then I guess on the transactional business lines, I guess, what are you seeing in capital markets and leasing pipelines heading into the seasonally important fourth quarter? And are you starting to get, I guess any visibility in the transactional businesses, as you look into the early part of 2022?

There is a huge amount of capital out there trying to get into the real estate space. And that's particularly true with industrial assets with life sciences, assets, with multifamily assets and even with office assets that are high quality and have the right tendency. So we think this year has been a great year for capital markets for both sales and financing. And we think we're going to have another great year next year. The trajectory on leasing is very positive, the quarter-over-quarter trajectory and compare to peak year is very positive. And so we believe next year will be a good year for leasing. How good it's going to unfold as we go through the fourth quarter. I will tell you that October has been very encouraging.

Thank you. There are no further questions at this time. I would like to turn the call back over Bob Sulentic for any closing remarks.

Thanks everyone for joining us, and we look forward to talking with you again when we report our year end numbers.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.