Welcome to Cushman & Wakefield’s Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce Mike Spooner, Head of Investor Relations for Cushman & Wakefield. Mr. Spooner, you may begin the conference.

Thank you, and welcome again to Cushman & Wakefield’s third quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results for the period. This release, along with today’s presentation, can be found on our Investor Relations website at ir.cushmanwakefield.com. Please turn to the page labeled cautionary note on forward-looking statements. Today’s presentation contains forward-looking statements based on our current forecasts and estimates of future events. These statements should be considered estimates only, and actual results may differ materially. During today’s call, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Reconciliations of GAAP to non-GAAP financial measures, definitions of non-GAAP financial measures and other related information are found within the financial tables of our earnings release and appendix of today’s presentation. Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2021 in the local currency unless otherwise stated. For those of you following along with our presentation, we will begin on Page 4. And with that, I’d like to turn the call over to our CEO, John Forrester.

Thanks, Mike, and thank you to everybody joining our call today. We’ve reported continued top line growth across all three segments, resulting in fee revenue of $1.8 billion, up 8% versus 2021. On a year-to-date basis, fee revenue was up 18%, while adjusted EBITDA is up 29% versus prior year. While the majority of our service lines have performed well this year, we are now feeling the impact of trading challenges and headwinds in specific areas, namely in subdued activity in our substantial Greater China platform due to the extended and continuing COVID-related lockdowns, the stronger U.S. dollar generating significant foreign currency drag versus prior year, and our capital markets service line globally, which is experiencing lower volumes compared with the same quarter of 2021. Looking ahead at the general environment over the coming quarters, it is reasonable to assume the recessionary conditions will continue to permeate the real estate sector, particularly in transactional business. Notwithstanding this, our revenue performance in the quarter illustrates the result of the multi-year strategy we have deployed with discipline to build a fully diversified and a more highly recurring revenue-related business. This strong platform, along with our continued progress in capital allocation strategy to prioritize investments in the long-term growth sectors of our industry continues to position us nicely and will allow us to more successfully navigate through the current macroeconomic environment. Fluid environments create opportunities for the largest global players to grow market share in the inevitable flight to quality. Now let me highlight a few trends that are working through our sectors and are apparent in the quarter. In the office leasing sector, the return to office continues to trend higher as the pandemic fades. Now at a post-pandemic high of nearly 50% occupancy in the U.S., where businesses are largely back…

Thank you, John, and good afternoon, everyone. For the third quarter, fee revenue of $1.8 billion grew 8% on the prior year. Fee revenue growth reflects strong leasing and PMF and performance, offset by lower capital markets activity in the third quarter versus prior year. Adjusted EBITDA for the third quarter of $202 million declined 5% versus prior year. The decline in adjusted EBITDA was principally driven by higher commission expense, foreign currency headwinds and COVID-related lockdowns in China. The higher commission expense was the result of brokers in the U.S., achieving higher payout tiers earlier than prior year due to the strong growth in brokerage in the first half of the year. Offsetting these headwinds were the earnings recognized from our Greystone joint venture, which performed in line with expectations for the quarter. Adjusted earnings per share for the quarter was $0.43, a decrease of 10% versus prior year. Taking a look at our fee revenue by service lines. In the third quarter, leasing revenue increased 16% versus prior year. Leasing fee revenue exceeded pre-pandemic levels, increasing 12% over the third quarter of 2019. Both the Americas office sector and the industrial logistics sector continued to perform well during the quarter. Capital Markets fee revenue declined 18% in the third quarter with all segments declining versus a challenging prior year comparison. As a reminder, Q3 2021 capital markets revenues grew 111% versus the comparable prior year in a markedly different macroeconomic and interest rate environment. Third quarter capital markets revenues were still above third quarter 2019 levels by 12%. And – in our non-broker service lines, performance across our entire PM/FM service offering was again strong this quarter, particularly in our project and facilities management businesses, with PM/FM and valuation and other service lines up 14% on 5%, respectively.…

Thank you. [Operator Instructions] Our first question comes from the line of Chandni Luthra with Goldman Sachs. Please go ahead with your question.

Hi, good afternoon. Thank you for taking my question. So you guys basically mentioned that you are focused on cost management. Could you please elaborate what are the levers that you’ll have to pull at your disposal? And then I think you said that you’ve already implemented targeted cost cuts in EMEA or maybe that was APAC, I’m sorry. Could you perhaps elaborate more in terms of what these are exactly? Thank you.

Hi, Chandni, thanks for the question. This is John. I think there was a blip in the line there. We’ve already actioned targeted cost actions across the whole business, not specific to any region. We began this work just at the turn of the end of half one when we felt that the market was likely to be moving against us. So the way I’d answer your question is that we, over the last three years, in particular, have been extremely highly focused on our cost management and also using that as a tool to expand our margin. $250 million of structural cost been taken out of Cushman & Wakefield during that period. And actually, the back end of that, some $30 million is also – is showing up in 2022. Now on top of that, we are already taking action to strip out costs in line with the volume changes that we’re seeing in our transactional business as well as being extremely cautious on our deployment of cash in discretionary areas. So I think that we’ve done extremely well as a cost management team over the recent period. That muscle memory is deep in the company. We’ve applied it already to this financial year, and that will have a material impact on our year-end close. And as Neil said in his call, as we build the plan for next year, we’ll give more guidance on the actual cost structure. But there’s nothing I’m seeing in the type of cost plans being put out by our peers that isn’t already fully formed within Cushman & Wakefield at this point. Neil, do you want to add anything to that?

I think you said it well, John. Yes.

Now I totally understand that. Look, I think it’s also an incrementally worse macro environment, right? So I was just hoping to get kind of more incremental color around that, but thank you. Help us understand how you’d get comfortable around your leverage? And how should we think about capital allocation going into 2023, just given where the trajectory of interest rates is going and given where your leverage at?

Sure, Chandni. As we look at our overall liquidity, we feel like we’re in a very strong position as we move into 2023. Leverage for the quarter moved up very slightly, but we still feel very comfortable in the range in which it’s in. We are clearly very focused on cash flow as we move into 2023, but we feel like we’re well-positioned as we go into next year.

Got it. Thank you.

In terms of the – Chandni, just adding a little – it’s John here. In terms of actual use of capital, we’ll be extremely careful and likely to be relatively muted us in the first half.

Understood. Thank you so much.

Thanks, Chandni

Our next question comes from the line of Anthony Paolone with Morgan Stanley – JPMorgan. Please proceed with your question.

Okay. Thank you and hi, I guess first question, just a clarifying one. I think you mentioned PM/FM, I think, in the fourth quarter, flat. Was that sequentially or year-over-year?

Tony, that’s year-over-year. And the reason why it’s a little lower than it is year-to-date is really two things. First of all, as contemplated in our plan, there are so contracts that roll on and roll off. So we expect the growth to be a little more muted than we’ve seen throughout the year in the fourth quarter. And then also, a lot of our PM/FM business is in Asia-Pacific. And so there will be some FX headwinds there. So overall, we feel very good about the business. We expect to see that up nicely this year and expect strength going into next year.

Okay. Has there been any appreciable change to just the pipeline and RFPs and things of that nature?

Tony, this is John. No, the nice momentum we’ve seen in our general PM/FM businesses across the world in the last two years to three years continues at the same sort of rate. We have a really good win rate. We have a really good retention rate. That’s actually showing up in the numbers in this quarter and year-to-date. And as Neil said, we continue to think that will move on. Traditionally, in recessionary times, it’s the recurring revenue businesses that can actually do pretty well as corporates try to reduce their own cost base, applied to real estate, so through outsourcing. And we totally expect that to continue with the volatility that’s surrounding the macro economy at this point.

Okay. And on China, can you maybe put some framework around just how big a business that is for you all because I mean, I understand the drag, but if it come up a bit more in your commentary than maybe some of your peers.

Happy to. Again, it’s John here, Tony. We’ve long been a leader in real estate services in China. And the way our business is structured at this point, you might remember, we did a joint venture with Vanke Services. I think over two years ago now, where we placed our recurring revenue business with that market leader. So the structure of that means that we only a flow-through of EBITDA. So when that is down a little, it just hits us straight on the EBITDA line. And of course, largely the transactional business within Greater China is extremely muted to the full year – likely through the full year now as we see very little activity. Now ultimately, what is a headwind to us this year becomes a tailwind once released. So we are optimistic about the overall real estate fundamentals there. But in terms of revenue, it isn’t material because ultimately, we have this extremely large recurring revenue business in APAC and Asia-Pacific, which drives the business, particularly in terms of volatility to continued pleasing growth.

Okay. Got it. And then my last one is on the cost side. And if I look at just your third quarter OpEx was $315 million, thereabouts, was up, I think, 4% year-over-year. Is that kind of the area that you would target to try to protect margins? I think, John, you had mentioned trying to reduce cost commensurate with the volume declines. So just trying to understand how hard or not that may be just if it’s got to come out of that line because the other costs are pretty much already variable or maybe I’m looking at it wrong.

Tony, I think you’ve got it right. About 45% of our costs, as you know, are variable. So those will move and those will just move with revenue. About 40% of the costs are semi-variable. That’s where we are – we have already initiated cost control. Those are discretionary spend, things like T&E, things like marketing, that sort of thing. And so you will see some savings there already actioned. And then about 15% of our costs are more fixed, and that’s where those costs take longer. That’s where – those are the costs that we’ll address as we go into next year. But as you think about costs, it really is this variable costs that will come down very quickly with the drop in revenue.

Okay. And those percentages you just gave, that’s across total, both cost of services as well as OpEx, not just that OpEx line…

That is absolutely right.

You are.

Okay.

You’re right.

Okay. Thank you.

Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.

Great. Thanks. Maybe we can go back to John’s comments on the office leasing demand. It seems from your outlook, like it’s still pretty solid. Do you have a sense from your occupier clients, are they taking more space or less space? And do you notice if they’re looking for anything different when they’re making these decisions?

Michael, thanks. I’m happy to elaborate on it because some of the things we’ve been talking about for a while now truly showed up in Q3. It was a really solid month for us – sorry, quarter for us in leasing. But that really highlighted the fact that as an organization, we tend to focus on higher-quality assets globally. So the flight to both quality in terms of Class A and then within Class A highly sustainable real estate meant that that was a highly traded asset class in leasing in the quarter, far more muted, I believe, through the good levels Billion and C. So there, flat to quality. And then within that, the lease terms being signed by occupiers are back to pre-pandemic norms. So therefore, there’s a commitment from the occupational market to see office as important as it was before the pandemic. Now in terms of the amount of space, we are in this evolving environment of more hybrid user space. And ultimately, at this point, we are seeing some occupiers in some sectors looking at slightly lesser takes. But I’d remind everybody on the call that ultimately, our revenue relies on deal volume and the dynamic of change in the market, not specifically the amount of space in total utilized. And one final point, which is – the vast majority of cities around the world are back to very similar pre-pandemic norms both in desk utilization and the type of net absorption that we’re seeing. But there are some very notable major global cities, which just happen to be very visible in terms of – that tends to be where many headquarters are located, it’s London, New York, San Francisco, where long commute times and other challenges have meant that actually, there’s a more dynamic office leasing market going on at this point. But I think, finally, what I would say is that we’re seeing some considerable construction cost increases coming through the market at this point, which makes the viability of new development quite difficult, which will see a focus on the refit of the B and C portfolios sitting in the market. So actually, they will come through as highly sustainable once capital is being allocated to those assets, which will release up a more aligned supply to demand because at this point, there actually isn’t enough high-quality Grade A highly sustainable assets globally to satisfy corporate demand.

Got you. I really appreciate the color there. And then maybe just one other one on cross-selling across business lines. I know you’ve talked about this being a focus in the past. And just with the capital market side of the business, seemingly pretty muted for the near-term. Does that make cross-selling opportunities harder? And how would you plan to address that?

The services provided by organizations like Cushman & Wakefield play to the full suite of needs of our clients. So I think you’re focused on the investor owner there. When there’s a lack of activity in terms of trading and sales in capital markets, ones tend to double down on the quality of the income streams they have from their occupiers so they get very focused on the retention of those tenants, the provision of high-quality services to them, but to focus on the provision of really high-quality property management skills, particularly in the return to office that we’re seeing at this point, but across all asset classes. So yes, there is a sort of a doubling down on the ability for us to sell our broader set of services to occupiers – sorry, to owners who are likely to be holding their assets at it longer at this point. I’d also just highlight, of course, that whilst there may be a muted level of actual capital markets deals in terms of sales going through at this point, the need to refinance continues at the lid of recent years. So that’s where we can also provide our capabilities. It’s not just in the equity sales side of the business, but it’s also in the debt refinance opportunity. And that will continue through this next period.

All right. That’s it for me. Thanks for the time.

Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.

Hi, thanks. You’ve got Pat McIlwee on for Stephen’s team today. So I think generally, we expect just short of 10% of office leases to come due each year, somewhere in that ballpark. But given that, that can has been kicked down the road a bit with some of these shorter-term leases, do you think you’ve been seeing some of that pent-up demand or those pent-up leases flow through? Or is that still largely to be seen?

No. I think we’re in a relatively normalized period part of lease renewals or relocations by the occupiers. Yes, there was that period in the pandemic where they kicked one or two years. And I think with the volatility that we’re seeing in the market now and a general approach towards caution by most corporate occupiers globally. There may be more cans being kicked actually over the next couple of years, particularly as organizations settle on what they think the future of the office truly is. But that’s sort of in the system of our revenues now. And whilst we don’t expect leasing to be immune from falls in global GDP because there’s a high correlation in particular, to GDP and job growth. We do think that this element of short-term renewals and also pre-pandemic long lease and norms that we’re seeing will continue.

Understood. Okay. And then switching gears, with great zone, you’ve now got a bit more exposure to the multi-family and DCM side of things, which you just touched on briefly. But in the prepared remarks, you had said that performed relatively in line with expectations. I just want to ask if you can talk a bit more about how that business performed in the quarter and maybe specifically towards quarter end, what you saw there.

So yes, the prepared remarks, we’re very clear about it performing as we’d expected in the quarter. We’re now three quarters into our ownership relationship with Greystone. Our teams are really beginning to gel and go-to-market together. We have found that has been a very positive sales proposition for us, and we’re beginning to grow market share in that equity debt market totally in U.S. multi-family. So we’re very pleased with the acquisition with the teaming that we’re doing with the Greystone team. And ultimately, as part of our plan to be the primary multi-family full-service provider in the market in the U.S. at this point, but globally in the future.

Okay. That’s great. That’s all for me. Thank you.

[Operator Instructions] Our next question comes from the line of Patrick O’Shaughnessy with Raymond James. Please proceed with your question. Patrick O’Shaughnessy: Heyy good evening. So year-to-date, your operating cash flow was negative $195 million. Obviously, there’s some seasonality in cash taxes that you had to pay for last year’s earnings. But how are you thinking about cash flow over the remainder of this year and then probably more importantly for 2023?

Yes. Sure, Patrick. You’re right. In the third quarter, we actually had positive cash flow, $38 million cash. Our cash flow, as you know, is always seasonal. We see an outflow in the first half of the year. And then we see the inflow in the back half of the year. This year was a unique year in that we had three things, which impacted cash flow. The first, as we said throughout the year was the significantly higher bonus and commissions that we paid out tied to 2021 performance. So those – the big performance, especially in December, got paid out this year. So that was a drag on cash flow this year. We also had some NOLs roll off cash taxes slightly higher. And then with the increase of our PM/FM business, there was an abnormal timing mismatch of some reimbursable payments and receivables, so that had a negative working impact. So the majority of the difference really is timing related this year. As we look to next year over the cycle, our cash conversion rate remains in that 30% to 40% range. Cash flow this year will be lower. Cash flow last year was significantly higher. And then as we go into next year, once again, we remain very focused on cash flow and cash flow conversion. Patrick O’Shaughnessy: All right. That’s helpful. And then APAC, is there a path back to double-digit adjusted EBITDA margins given the cost actions that you’re taking?

I think the – Patrick, I think the most likely path back will be a pickup in transactional business across APAC and the reopening in particular, of Greater China. As I say, we have a very large-scale PM/FM business out there. So driving up to double digits doesn’t come necessarily from within that service line alone. We do need the mix issue to come back with transactions. Given so much of our business out there is actually PM/FM, therefore, largely labor applied to client sites. There isn’t a huge amount of OpEx this question earlier. There’s a huge amount of OpEx applied to that business. But we’re being very cautious on where we find cost opportunities across the whole business and APAC is not immune to that. Patrick O’Shaughnessy: All right, understood. Thank you.

Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Hey, just a couple of quick ones back to the cash flow question. I think you talked about sort of the seasonality year-to-year or I guess some of the differences year-to-year. I mean when you take a step back, what’s the sense of – what’s the annual run rate of the operating cash flow we should be thinking about historically on the business and so forth, right? Granted that 2021 and 2020 are sort of odd years. But sort of in your minds, what’s that number usually trends to?

Yes. So I think if you take the average of the two years, you’re getting pretty close to a 25% to 30% cash conversion rate based on adjusted EBITDA. And that is the target that I would use over the long run. I think it’s – as I said, a lot of this year’s cash flow was timing. You saw the very significant, I think last year was higher than expected, as we’ve said. So that’s probably a good guide as you look forward to the business.

Okay. Great. And then just going back to some of the comments on 4Q, I’ve got the PM/FM at flat. Maybe can you remind us again what you were thinking for leasing and sort of any color commentary there in terms of that year-over-year growth. I think I missed that.

Yes, sure. At this point, given the significant uncertainty we’re seeing as we move into the fourth quarter and the fact that December is such a big month. We are not providing specific guidance around brokerage. What we are saying is that we expect it to be down significantly. And then we’ve also given guidance around the margin we expect given the fact that we are going to be extremely cost conscious and cost-focused and protecting that margin. So you will see the brokerage, which obviously has a higher flow through. We’ll do our best to protect margin against that, but it’s very difficult to fight that mix. And so that’s what’s impacting the margin.

Great. And then just my last question is, I think the commentary on office was really helpful. Maybe as you think about some of the other sort of verticals, industrial, departments, even hotels or whatever. Maybe I’d love some commentary on views there, how those are performing, opportunities there as well. Thanks.

So I’ll deal with the very large asset classes. I think if you talk about logistics, as I said in the commentary or the tape piece that the quarter was still very strong in logistics and industrial leasing generally, with only 1% vacancy rates in the U.S. So we do think that, that is likely to continue, certainly through the long-term. Retail is showing a very robust response towards a long-term change in the amount of physical retail required by the world, and we continue to see pleasing growth in retail leasing service line, although it is from a significantly lower base than historically. But I think the real story is in the evolving nature of the newer asset classes. I touched on the growth we’ve seen so far this year in Life Sciences. I could point to similar pleasing growth that comes through from the work that we do in data centers and other secular growth areas. So in a way – in the same way for offices, it’s wrong to make a generalization because you need to look at the quality of the office, the sustainability level of the office, potentially the location of the office, most asset classes need to be discussed in a more granular level. But on the whole, as I said, leasing in that quarter three showed up very nicely for us, reflecting the strength of the brand and our position in global markets, but we do not expect it to be immune from the impacts on GDP and they’re flowing through the macro economy at this point.

Great. Thanks so much.

There are no further questions at this time. I will now turn the call over to John Forrester for closing remarks.

Just to say thank you for everybody for joining us here today, and of course, for all of those clients and our team members listening. Thank you for your ongoing support at Cushman & Wakefield, and we look forward to continue our relationships with all of our clients, and of course, all of our great time. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.