Welcome to the Cushman & Wakefield Third Quarter 2023 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] Please note, this event is being recorded. It is now my pleasure to introduce Megan McGrath, Head of Investor Relations for Cushman & Wakefield. Ms. McGrath, you may begin the conference.

Thank you, and welcome to Cushman & Wakefield's third quarter 2023 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 in our presentation 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 the appendix of today's presentation. Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2022 and in local currency unless otherwise stated. And with that, I'd like to turn the call over to our CEO, Michelle MacKay.

Thank you, Megan, and thank you, everyone, for joining us this afternoon. I'm excited to kick off my second earnings call as CEO. Before we get into the numbers, I've often been asked what differentiates me as a leader. And the answer is simple, I have a bias to action. And you can see that in what we've accomplished during the third quarter. We made significant progress transforming our capital stack as we refinanced $1.4 billion of our 2025 term loan. This initial move has pushed out our maturities and will reduce the company's leverage by approximately $200 million in 2025. There was strong interest in the offering, it was well oversubscribed with more than 100 lenders in our term loan and more than 125 lenders in our bond. Additionally, we are ahead of schedule on our $130 million cost-out target for this year. The strong execution contributed to the sequential increase in our Q3 adjusted EBITDA margin of 9.4%. Our Q3 adjusted EBITDA performance of $150 million outpaced our Q2 performance despite softening market conditions as we continue to make choices that are in the company's long-term interest, regardless of the macro environment. It's true uncertainties remain, and we saw the transaction markets take another pause in mid-August when rates moved higher. But even as transactional markets were idle during the quarter, we were not. We stayed focused, taking the deliberate actions I just discussed to improve our balance sheet and reduce our cost structure. What's really clear is that we have the right people, processes and capabilities to deliver for our clients, employees and investors. We've done the things that we need to do to stabilize the business, which puts us in the seat to make prudent and disciplined investments to ensure that we can capitalize on opportunities…

Thank you, Michelle, and good afternoon, everyone. For the third quarter, we reported a sequential increase in both adjusted EBITDA and adjusted EBITDA margin despite a sequential decline in revenue. This demonstrates our commitment to enhancing profitability through our continued focus on driving cost efficiencies in our business. During the quarter, we also made significant progress on improving the strength and flexibility of our balance sheet and saw improvement in free cash flow with enhanced working capital efficiency. Moving on to the details of the quarter. On the top line, while transactional markets remain challenged, we saw an improvement in year-over-year brokerage trends as we began to lap the difficult market conditions which began in late summer 2022. Third quarter fee revenue of $1.6 billion declined 11% versus the prior year with capital markets revenue down 33%, leasing revenue down 16% and PM/FM revenue down 1%. We mentioned on our first quarter earnings call that due to a change in the gross contract reimbursables at one of our facility services contracts, our PM/FM fee revenue would be reduced by roughly $90 million on an annualized basis with no impact on total revenue or adjusted EBITDA. Excluding the impact of this change, PM/FM revenue was up roughly 2% in the quarter. Valuation and other declined 18% in the third quarter as the slowdown in transactions continue to result in lower valuation activity. Adjusted EBITDA for the third quarter of $150 million was down 27% versus prior year, and our third quarter adjusted EBITDA margin was 9.4%. During the quarter, we continued to benefit from our previously announced cost savings programs. We have realized $98 million of gross savings year-to-date and expect to end the year slightly ahead of our previously communicated $130 million target. We believe we've taken the appropriate level…

Thanks, Neil. I'm proud of what we've accomplished during the third quarter and the work we are doing to position the company for the future. We will continue to control what's within our reach with a focus on creating flexibility and optionality in this next stage. I am confident that our go-forward strategy will position the company for long-term sustainable growth. And I look forward to sharing our progress with you each quarter. And now I'll turn the call over to the operator to take your questions. Operator?

[Operator Instructions] Our first question today is from Anthony Paolone with JPMorgan. Please go ahead.

Great. Thank you. I guess my first question relates to the plan you outlined to find incremental cash to reduce debt over the next few years. I'm wondering if you could expand on that a bit and just maybe put some brackets around order of magnitude and what sort of assets do you see CWK having right now that could be monetized. Like, are these businesses? Are there investments on the balance sheet that could be sold? Just wondering if you can give a little more detail on all that.

Sure. I think the best way to think about our long-term target for leverage is between the 2% to 3% range. And we plan to get there through a combination of debt paydown and EBITDA growth. Our goal is to demonstrate a balance between the two and the way that we're allocating capital. So we want to both be reducing debt and investing in growth, right? This is not an either/or conversation. And I think what's important for everybody to understand is that we're committed to reducing our debt level over time as we grow the business because we believe this is the optimum path to generating strong shareholder returns. In terms of monetization, I think before I talk about that, I just want to speak to the fact that monetization can take place in a variety of forms. It's not always an all-out sale of a business or an entity. And what I can say about that is, because of the way the company was built through a series of mergers and acquisitions, there are components that were brought into the entity that are not necessarily strategic or core. And we're not going to outline or speak what they are or to them directly today, but I can tell you that they are small in size and they wouldn't necessarily meet the long-term growth profile of the company.

Okay. Thanks for that. And then just my second question, Neil, I think you mentioned coming in at or a little bit above $130 million cost-saving target for '23, and you felt like that is kind of where you'd end up and felt good about that. But just wondering, if the business stays challenged into '24 or maybe goes longer before we see much recovery, do you have other levers you could pull there? Are there other cost saves that could be contemplated?

Tony, at this point, we feel like the $130 million that we're targeting is the appropriate level to not only ensure our margins in this year 2023 but also through 2024 in terms of what we are forecasting, and that contemplates a marked recession. We are always focused on efficiencies. So there are always additional levers that we can pull. We always are improving the operating ability of the business. I think the easiest way to think about it is, in that $130 million of savings, about 20% are temporary costs which we took out of the business in 2023, things like travel, marketing, those types of costs. If we did see the market continue to run at the same sort of levels all the way through to next year, then obviously, we would hold back on allowing any of those costs to come back into the business. And then that cost savings on a permanent basis would increase from about $130 million to about $160 million for the year.

The next question is from Alex Kramm with UBS. Please go ahead.

Yes. Hey, good evening, everyone. Maybe starting first on the PM/FM business, maybe it's a little nitty-gritty here. But, I know you had the contract change, but if I look at your updated outlook, Neil, I don't think you mentioned it, but I think the low single-digit expectation is a downgrade to your prior expectation from, I think, low to mid. So just curious what else has changed in that business. Is churn increasing? Are the sales cycles just longer? So maybe just talk about that business because it seems like you lowered expectations there slightly.

Yeah. This is Michelle. I'm going to let Neil talk you through some of the numbers, and then I'll address our services strategy.

Sure. Hey, Alex. I think the best way to think about our services business is really considering three different things. I should say, the first one is the fact that we had that contract change. That takes the growth from negative 1% to a positive 2%, which is in line with our low to mid but arguably at low end. The second thing is, in the prior year, we saw very strong services growth. In fact, that growth was double digit all the way through the first three quarters of the year. So as we came into this year, we knew we would have slightly tougher comps, and that -- you're seeing that in the numbers that we showed in the third quarter. And then finally, in Asia Pacific, it really was our project management business which was slightly lower than expected. That business does tend to be fairly lumpy. We did see very strong activity a year ago. And so if one looks on a year-to-date basis, APAC services was actually up around 6%. And so that sort of smooths some of the lumpiness.

And I want to make it clear that while there's a few unique items this quarter impacting the results, we aren't satisfied with the low level of organic growth that we reported in our services business. And this business is a big priority for us and a key area to invest in. So there's a lot of opportunity for us to grow our services businesses organically, and we will be focusing on driving accelerated growth in this business specifically.

All right. Fair enough. Thank you. And then maybe secondarily, I don't know if this is a follow-up to an earlier question on 2024, but obviously, you are looking for a second half recovery next year. But if we stay in this environment here, and I'm not so much focused on expenses but more for the growth outlook, do you still think there's growth in the business from these kind of levels? I mean, again, you have the -- you have a large portion that are kind of like recurring businesses and then I think, again, on the sales side, capital markets side, we're pretty soft already, hard to see it go a lot lower. And then on the leasing side, I think renewals are actually supposed to be down next year, but maybe you're still getting market share. So maybe a little bit of an early question about 2024, but in an unchanged environment, do you actually think you can grow from here? Or would there still be some headwinds here?

Okay. So there's a couple of things to unpack. So let's just start with leasing, and we'll give you our experience here. So this year, we've got a couple of large leases this quarter for occupiers, but we're also seeing them holding off on decision-making. How you can translate that is they're going to have to make a decision eventually. So occupiers have taken a defensive posture this year because of higher cost of capital, right? And they've been very careful with expenditures, which obviously impacts their decision-making. But it's really unusual for leasing to dip ahead of a downturn. Typically, leasing moves in line with GDP and job growth, that's what you're getting at. But what we think is happening is perhaps some of the weakness that would have been in 2024 is actually getting pulled forward this year. So we expect leasing volume to hold through next year and hopefully improve over time. But as you've said, if that were not to be the case, we're well prepared, as Neil has spoken to, in both our cost structure and the fact that we have a services business. When you talk about capital markets, predicting the timing of cap mark, the rebound is really difficult, but we know it's going to come. And if you look behind on the surface, the preconditions that will lead to the recovery are starting to form in here. Inflation is coming in, right? We've got the Fed this week. We think that there's going to be a pause in there. We're starting to see some of the shoots around stressed and distressed asset trading, valuations and other indicators in that sector.

The next question is from Michael Griffin with Citi. Please go ahead.

Great, thanks. Maybe just piggybacking off of your previous response there, Michelle, on the PM/FM business. You talked about organic growth initiatives you're going to undertake. Is there any chance you can quantify some of those initiatives for us? And any color around that would be helpful.

Yeah. I mean I'm not going to quantify it for you today, but I will tell you that you're always going to see a toggle between us deleveraging and investing for growth, right? We're not just pushing on one pedal. We're going to push on both pedals at the same time. Services, the duration, the nature of that particular business for us, is really valuable in relationship to our other business. And when you think of it in pockets, think about GOS, think about asset and think about CW Services, and those are going to be key areas that we target for investment.

Got you. That's helpful. And then maybe just on the capital markets business. For the deals that are trading, I mean, can you give us a sense of what's out there, what buyers are expecting, if anything, where buyers and sellers are? And anything there would be helpful.

Yes. I mean I think there's a lot of friction in the surface still with regard to clearing levels and trading. And you clearly have movement of cash flow, flight to quality in the assets as well. 60% to 65% of the deals we actually see getting done are still in industrial and multifamily. And those are the two sectors that buyers, sellers and lenders have the most confidence in. There's strong buildup in capital for opportunistic, right? There's a lot of dry powder out there, and investors are also getting anxious to deploy it. So we don't think it's a matter of is it going to happen, right? It's going to happen, but we probably have a couple more months before we really start to see volume in terms of clearing in the stress and distressed markets.

The next question is from Ronald Kamdem with Morgan Stanley. Please go ahead.

Yeah, just two quick ones. So one on the capital markets recovery, I think a lot of the peers have talked about sort of a second half '24, which obviously is probably a year later than we all expected. How is that being determined? Is it just sort of, hey, the macro is going to be better, so therefore, people have to transact? Or is there something more that we should be looking for, for those deals to unwind? I'm just trying to figure out, like, how are we pinning down the days for a recovery? Or is it just based on the macro? Thanks.

Okay. Yeah. I mean I think rate stabilization is the key, right? That leads to cap rate stabilization, that leads to stronger transaction activity. So I think when we're all taking a point of view that leans toward the second half of next year, a lot of it has to do with what the curve looks like, right? You want to have a normalized curve. The real estate markets have functioned for 50 years, right, when the 10-year was above 5% and functioned well. So we're waiting for the timing to happen so that we have a normalized curve and people can start to transact around that versus waiting for when is the fund going to come out next.

Got it. And then my next question was just on -- just going back to the cash flow statement, it looks like there was a lot of cash that flowed through this quarter. Just any sort of one-timer and as we're thinking about the back half of the year, any other sort of one-off that we should think about as we're translating EBITDA to cash flow?

No, Ron. Generally, what we're seeing is, with the lower earnings, we're seeing the lower earnings being offset by the release of working capital. Our teams in the field have done a phenomenal job really focused on working capital. And so we are seeing the benefits of that. We're also seeing lower cash taxes as a result of the lower earnings. So those are sort of the items that are driving the free cash flow but nothing specific and onetime. We do think cash flow this year is going to be very strong.

[Operator Instructions] The next question is from Stephen Sheldon with William Blair. Please go ahead.

Hi, Neil and Michelle, you've got Pat McIlwee on from William Blair. My first question is, with US office vacancies near 20% now, how much do occupancy trends in that space impact the demand you see for outsourcing services in your PM/FM business? And has that been or would you expect that to begin weighing more on growth in the business at all?

I mean let me just come back to you with that question. So do you mean that the vacancy in office buildings impacting our services business?

Correct. Yes, demand for the outsourcing service.

Yeah. I think the way that we're thinking about it now is that we think we're nearing the end of the remote work impact. So we've seen a lot of it happen already, right? And something to keep in mind is that the average lease in the US is about six or seven years long, and most businesses have already made their decisions on space. So either they signed a new lease likely for less space or they're still in their existing space or they listed their space to sublease. So a lot of this has already played through the system. We did have some impact over the course of 2023 in the office portfolios that we manage. But I wouldn't anticipate a material change in that over 2024.

Understood. Thanks. And then just as a follow-up, a little bit further on the cost-saving initiatives. So we've heard peers say that they're looking a bit more producer headcount given the longer expected downturn. And I'm just curious if or how your strategy has changed on that front in terms of maintaining recovery -- capacity for recovery versus supporting margins until we do see that recovery.

I think we've always been very focused on the return of any investment we're making in producers. And so I think we've been very prudent with our capital allocation. We feel good about the investment we're making in growing our produce in our recruiting and our retention. And I don't see that changing as we move forward either -- in either direction. So we feel very good about our production capacity and how that sets us up for any potential recovery in 2024.

Yeah. And just to give you a little bit of our philosophy around it, we look at talent much like we look at our portfolio of businesses, right? And like in any business, we question, is that team or individual focused on what we consider core strategy, an area that we're really focused on? Do the economics of that makes sense, right? What do we want in new talent that we're bringing in? And so we're always paring and pruning our talent so that we have advisors in the shop that really drive the future of the company. So I think that when you think about it, movement for us, meaning people leaving and people coming in, is going to be a normal course of business at Cushman.

Your next question is from Patrick O'Shaughnessy with Raymond James. Please go ahead. Patrick O’Shaughnessy: Hey, good evening. So what would the implications of a potential WeWork bankruptcy be on your strategic relationship with WeWork? Are there any tangible risks to any revenue streams?

There are not. The investment as a whole -- we've already taken the mark-to-market there. And then in terms of our relationship with them, we do, do a lot of work for them, but it's not material to the overall company. So I would anticipate that if there was a bankruptcy, many of those spaces still need to get serviced, still need to get managed or still need to get changed. It's an essential service. So we don't see it as a material impact to the company. Patrick O’Shaughnessy: Great. Thank you. And then can we get your updated thoughts on Greystone? In particular, do you consider Graystone to be a core asset and a core part of your strategy? Or would they maybe fit into the non-core bucket?

We view our investment in Graystone over the long term. We remain very constructive on the multifamily platform, and we believe the underlying long-term fundamentals in that business are strong. While we did see a decline in Greystone primarily due to a reduction in lending volumes, we're actually quite pleased in the quarter on a relative basis in terms of our performance. We took share in all three of the agencies. We remain the number one FHA partner or lender. We're number two with Fannie, number five with Freddie. And so we continue to take share and view that as very strategic as we move forward.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for participating in today's presentation. You may now disconnect.