Q3 2019 Earnings Call
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It's now my pleasure to introduce spill nightly ATP as investors relation and treasury as Cushman and Wakefield Mr. nightly you may begin the right.
Thank you and welcome again to Cushman and Wakefield third quarter 2019 earnings Conference call.
Earlier today, we issued a press release announcing our financial results for the period. That's really just can be found on our Investor Relations website, along with today's presentation pages, but you can use the fall off.
Materials can be found out I, our dot cushman Wakefield dot com.
Please turn to the page labeled forward looking statements. This presentation contains forward looking statements based on our current forecasts and estimates of future about.
These statements should be considered estimates only an actual results may differ materially.
During today's call, we will refer to non-GAAP financial measures as outlined by us and she's guidelines.
Reconciliations of GAAP to non-GAAP financial measures are found within the financial tables of our earnings release, an appendix of today's presentation.
I'd like to remind you that the company uses fee revenue adjusted EBITDA adjusted earnings per share in local currency to improve comparability of current results and to assist our investors and analyzing the underlying performance of our business.
Fine definitions of these non-GAAP financial measures and more detailed financial information in the tables of today's earnings release in the form 8-K.
In addition, I would like to note that throughout the presentation comparisons in growth rates are to the comparable periods of 2018 and in local currency.
Before I turn the call over to Brett I'd like to announce it today will be my last earnings call as he VP of IR.
We'll be transitioning to a new role within the firm as Chief operating officer of our global Occupier services business.
Len Texter will be the head of Investor relations going forward.
For those of you following along with our presentation before we begin on page five and with that I'd like to turn the call over to our executive Chairman and CEO Brett White.
Good afternoon, and thank you all for joining us today and thank you Bill for all your terrific work, that's our IR lead this past year.
Today, we reported solid growth in revenue in all three of our segment.
Overall, we generated mid single digit revenue growth for the third quarter and upper single digit growth on a year to date basis.
Adjusted EBITDA of $169 million for the third quarter.
$431 million for the first nine months of the year was consistent with our expectation.
As we look or third quarter resolved, we remind you that we manage our business on an annual basis.
You know the transactional nature of our capital markets and leasing Circus line.
Unevenness in our quarterly result.
Last year, we had a particularly strong third quarter led by 34% and 32% growth in our more profitable capital markets and leasing businesses.
The significant prior year growth, resulting modest shift in service line revenue for 2019 was contemplated in our guidance for the year.
Duncan will speak to this and our third quarter results in more detail later.
In addition to our financial performance I'd like to share a few other notable highlights in the corner.
Our leading global brand continue to earn strong third party recognition in the third quarter 2019.
Including being named the number one commercial real estate advisor in the world by Euro money for the second consecutive year.
NB named a military friendly silver employer.
Our hiring.
Dan Smith and commitment to veterans here in the United States.
In the third quarter, a global occupier services business continue to win new mandates as large corporate occupiers trends cushman and Wakefield for real estate outsourcing.
For example.
We want to new assignments from Boeing to provide integrated solutions, including transaction management brokerage strategy and consulting services.
Across their 85 million square foot real estate portfolio.
And 43 countries.
We also want to new mandate to provide integrated facilities management services to Kimberly Clark 20 million square foot administrative and manufacturing portfolio across North America.
Similar examples of new outsourcing assignments and our consulting services business included a three year expansion.
To manage 13 building portfolio for Harvard University.
And renewal of a contract providing services to nearly 800 locations, where the companies have a hold USA.
In addition, some of the large assignments in our leasing and capital market business isn't the third quarter included.
Representation of the Coca Cola company in their $907 million sale 71, one fifth Avenue in Manhattan.
In addition, we secured debt financing for the buyer Nightingale properties and Wafra.
We represented the landlord and a joint venture a vision real estate partners and Rubinstein partners at least 315000 square feet in the worn corporate center in New Jersey.
We represented Nuveen real estate and disposable to 290000 square foot premium retail destination in Italy.
We manage the sale of two for two exhibition Street in Melbourne, Australia, a 47 story, great a commercial office tower.
Behalf of Oxford, and desktop property partners like BP and Investor commercial property fund for $563 million.
And finally, we brokered the sale of Boujis junction towers in Singapore.
Got a sale price of $396 million.
Now turning to page six.
You'll see our dashboard on the global real estate market.
Well, we're continuing to monitor trade policy Brexit.
And events in Hong Kong.
Commercial real estate leasing fundamentals remain stable.
Against a weaker macroeconomic backdrop.
Demand for space is still healthy.
And occupancy levels are holding firm and generally are still improving in the U.S.
10 year government bond yields globally have generally declined over the last year, making commercial real estate spreads increasingly attractive.
According to recent RC idea U.S. investment sales were down 6% in the third quarter compared to a year ago, but this level of activity is still strong.
Leading indicators that correlate with commercial real estate services continue to point to growth.
Labor markets are still creating jobs.
You asked consumer confidence levels are still higher today than at any point in the previous cycle.
So in summary.
The first nine months saw solid growth in revenue and EBITDA for Cushman and Wakefield.
Real estate fundamentals remain stable.
Overall, we remain on track with our guidance for the year as Duncan will speak to in a moment.
And with that Duncan Palmer, our Chief Financial Officer will now discuss our financial results in detail.
Thanks, Brett and good afternoon, everyone.
To stop let's turn to page eight which summarizes our key financial data for the third quarter and year to date.
We reported year over year fee revenue growth of 4%, a 9% for the third quarter and year to date periods, we generated solid growth across each about three segments led by our P. M. FM set his line.
Third quarter, adjusted EBITDA of 169 million was down $11 million or 5% from the prior year, primarily due to results in EMEA.
Year to date, adjusted EBITDA of $431 million was up $8 million or 3% from the same period in 2018, driven by improvements in a pack in the Americas.
A reminder, that we saw unusual strength in the third quarter 2018, with 32% growth in leasing 34% growth in capital markets, leading to a 77% growth in EBITDA for that period.
Adjusted EBITDA margin for the third quarter and year to date was 10.9% a 9.6% respectively.
<unk> EBITDA margin performance for the third quarter and year to date effects the impact of the very strong third quarter 2018 broker investments made in the second half of 2018, they modest shift in revenue towards property facilities and project management, which we call PFM.
Generally P.M. FM is lower margins than our brokerage service lines.
Addition, as you may recall, we made investments in the second half of 2018 and broker recruitment in the Americas, which as we mentioned on the last call ramping up and are expected to contribute in the fourth quarter.
Third quarter adjusted earnings per share was 37 cents and year to date adjusted earnings per share was 87 cents.
Moving onto page nine and 10, let me show fee revenue growth rates by segment and by service line.
All three segments grew in the so called out with Americas up 3% me up 4% and a pack up 7%, bringing that year to date growth rates to 8%, 11% and 14% respectively.
In this quarter growth was particularly strong in our valuation on other and P. M Fms service lines up 17% and 12% respectively.
PM FM was up double digits in our Americas EMEA segments as mentioned this growth, including the acquisition of QSR represents a modest should revenue shift <unk> FM. This year, we continue to be pleased with the performance of QSR. This year.
But in P.M.F. and facility services represents a significant portion of this service lines fee revenue in facility services. We typically it's helpful. Subcontract a variety of services through a major operations in both the Americas and a pack this business generates solid cash flow on a stable revenue stream and on an annualized basis typically has low single digit.
Gross.
Fee revenue growth and facility services was in the mid to high single digits for both the quota and year to date the.
The rest about PFM service line, which comprises occupier outsourcing property management and project management operations grew at double digit rate in all three segments, but the quota and year to date.
With that we will start to more detailed review of all segments, starting with the Americas on page 11.
Third quarter fee revenue increased 3% and your state revenue increased 8%.
This is driven by P.M., FM, which was up 13% for the quarter and 14% year to date and valuation another which was up 35% for the quota and 11% year to date.
Then on America's PM FM service line facility services operations represent a little over half of our fee revenue.
I will say services fee revenue was up high single digits for the quarter and year to date driven by growth at existing clients and new business wins.
The rest of the P.M. FM service line grew at a double digit rate.
Oh leasing business was down 9% for the quarter, but was up 3% for the year and capital markets was up 2% for the quarter almost flat for the year.
As we have discussed we had a very strong third quarter last year in both leasing and capital markets year to date trends and leasing have been consistent with our expectations always some some growth in capital markets in the quarter you state growth has been modestly below where he had expected against a strong 2018 comparable.
Americas' Q3, adjusted EBITDA of $125 million was down 3%.
Year to date, adjusted EBITDA of $318 million was up 2%.
Americas performance for the third quarter reflects the impact of the very strong third quarter. In 2018. In addition, we experienced a modest shift in mix towards PFM, driven by QSR and by the strong growth in facility services.
Our investments made in the back half of 2018 in fee and the recruitment, which we discussed on last quarter's call remain on track and ramping up during 2019.
We expect them to be accretive to EBITDA in the fourth quarter and to continue to ramp in 2020.
Moving onto EMEA on page 12, third quarter fee revenue increased 4% and year to date fee revenue was up 11% driven by solid growth in <unk>, P.M., FM and capital markets service lines.
A P.M. FM service line in EMEA represents less of our overall segment than any other two regions, which grew 25% in the quarter and 28% year to date.
Capital markets was up 10% for the quarter, 9% year to date. These trends were partially offset by leasing activity, which was down 13% for the quota and down 2% year to date.
In 2018, our EMEA leasing business also experienced a very strong third quarter growing 25%.
These trends are consistent with our expectations and principally driven by the UK.
Third quarter, adjusted EBITDA of $20 million declined $9 million versus the third quarter 2018.
Year to date, adjusted EBITDA of $36 million was down $5 million versus the same period in 2018.
Our outperformance in EMEA reflects the impact of a strong third quarter in 2018 slower leasing activity and unfavorable currency impact. We also experienced a mix shift in 2019 driven by growth in P.M. FM.
Now for Asia Pacific segment on page 13 growth continues to be strong with third quarter and yesterday fee revenue up 7% and 14% respectively.
Valuation another good 29% in the third quarter, a 19% year to date.
Jason grew 6% in the quarter, a 9% year to date.
Capital markets was down 9% in the quota, but has grown 23% year to date.
Finally, PFM grew 6% in the quota and 13% year to date.
PM FM represents more than half of the fee revenue for the segment.
Strong revenue performance across the region drove an 11% increase adjusted EBITDA for the third quarter and 17% improvement year to date.
Turning now to page 14.
We are confirming our full year, adjusted EBITDA guidance of $685 million to $735 million as well as our expectation of margin accretion for the full year.
Consistent with what we have seen so far this year, we're anticipating global brokerage revenue growth in the low single digits for the full year.
With that I'll turn the call back to the operator for the Q and a portion of today's call.
As a reminder to ask a question you want me to press Star One I guess, how Spain.
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And your first question comes from the line of Anthony polling.
Hi, Thank you.
My first question relates to your full year guidance for EBITDA you kept at the same and so it implies like a fairly wide range for the fourth quarter. Now can you talk about where you see the risks or opportunities you've given a line of sight at this point on the quarter.
And what may swing that up or down.
Yes, its Duncan I'll comment on on the pull your guidance, obviously guidances has not changed I don't think.
Anything ready so following up performance year to date gets any reason to change that guidance as you heard global brokerage growth as being sort of low single digits year to date, and we kind of expect out for the full year I'm. Obviously, the biggest uncertainty in the fourth quarter is exactly what transactions close and when they close and how they close to that probably always going to be the.
No just item of uncertainty on the upside down on the downside.
In terms of things, we expect benefit us in the fourth quarter on a year on year basis, because obviously you nothing from a guidance point of view you can tell we're expecting Q4 of the Q4 to be up quite materially obviously does QSR, that's a and acquisitions in general, but specifically QSR.
We talked about the investment.
In Brooklyn, Crudes, we didnt the backend in the Americas last year, we expect that to be accretive in EBITDA in the fourth quarter.
It's been living drag a in the rest of the is the that's going to be an element.
And in general generally speaking in terms of just overall accruals in the fourth quarter last year. For example, bonuses, we accrued because if we blew away out targets last year, we accrued quite a bit more bonus in the fourth quarter last year them plan, we don't expect necessary to do quite that level of accruals. This year. So that's kind of elements will drive.
Life, you have yet to be quite a bit of gross but the biggest uncertainty always in the fourth quarter he's going to be in transaction volumes are more closes so we haven't changed guidance.
Because nothing really so far in the areas given a specific reason to do so.
Okay and then my follow up is as it relates to EBITDA margins I understand the mix shift year over year on some other investments being a drag but if we start to look out you know, whether it's a year or two years forward and capital markets and leasing.
Doesn't put our boys in growth and it's it's kind of a more normalized growth how should we think about just your ability to push margins up and whether you know that opportunity will still be there, if we sing and capital markets aren't growing quite as quickly.
Anthony It's Brad I'll give you a quick answer I'll turn to Duncan to give you a bit more detail, but that's not going its talked about in the past we have multiple levers.
No margin.
And robust transactionally years, they grow nicely because of the high margin transactional businesses.
It's in future quarters future years, we see a slowdown in leasing in capital markets, we would exercise other levers we have.
To to grow margins, but Duncan.
Yes, so I mean, just to kind of reiterate what we've said before I think it's still stays intact. There are three basic mechanism by which were going to be able to continue to focus very heavily on operating margins.
Growing on a sort of annual base is one of them is to be very focused on operating efficiency as Brad said, we were able to do a lot of that obviously any integration relatively less of that probably now that this is what was in the integration, but still a very big focus for us, it's something which we spend a lot of time focusing on projects to do secondly, we're able to.
And if it from some accretion to margin that Jim when it comes from the infill acquisitions, Jim the accounts or maybe about a third of our overall topline revenue growth and is generally accretive to margins when we do it particularly given our track record of being able to take synergies out and then the said is getting benefit from accretion of.
Organic revenue growth to the bottom line, which occurs across pn and PJM valuation leasing on capital markets or able to get you know quite a lot of benefit from some of the even if you know one or two of those service lines is not growing organically, maybe as fast as as we saw maybe in 2018 2018.
And we had a monstrously good growth yeah, particularly in other brokerage service line. So we got a level of leverage from that you'll also notice from last year, we felt pretty good benefits to margin accretion from operating efficiency and we also don't pretty decent Pms I'm glad so all those things stay intact and nothing about the thesis of ability to grow margins is specifically links to.
Having to see very high growth rates in brokerage service line specifically.
Okay. Thank you.
Your next question comes from the line that Stephen Sheldon from William Blair.
Hey, Thanks for taking my questions and congrats on the new role Bill.
So first you know clearly a tough comparison and leasing this quarter that we probably didn't account for a well enough, but just looking more broadly you've had two competitors report third quarter results already in both saw decelerating leasing trends.
It does it seem like the market is broadly slowing some on the leasing side and are you seeing any cautiousness from companies about signing.
Longer term leases just given the length of the current cycle.
Sure. This is Brad let me begin by saying that the fundamentals underpinning leasing both in Americas and more broadly globally remain solid.
As you mentioned and you're right 2018.
Through Q3 that your year to date, we were up 25% in the Americas and 21% globally.
I answer your question about the year and how we think about things going forward, we beat even those heady numbers from 2018 year to date, we expect to beat them for the year.
I don't I don't know that we've seen much change in the complex shouldn't have a type of transactions.
That are being completed this year award that we expect to be completed.
In the fourth quarter from what we've seen in prior quarters in prior years.
Good mix by vertical and a good mix by size and term.
It's probably fair to say that given the economic friction extent in the broader global economies.
We are seeing folks.
More cautious.
But that can of course change on a moment's notice that again.
The way we are looking at our leasing performance were up for the year against a very very difficult comp last year.
Okay. That's helpful. And then maybe just a quick update on the recruiting environment. You know you hired aggressively in the second half 2018 the Americas.
I'm guessing you didn't call out recruiting against I'm guessing you're not maybe ramping as much but are you planning to do I mean are you still pointing to grow producer headcount as we start to think about 2020.
And maybe just talk about the broader recruiting environment, and how easy or hard it might be at this point to find and recruit talent sure well first of all the way we think about recruiting is really.
Based on the the objective of raising revenue per producer first and foremost so that would that would be thinking that as a regeneration of the salesforce. So we're hiring higher producing folks.
That is our goal every year I think that you should expect.
Regardless of market cycle, we will always be a recruiter of high quality talent.
I would say that as it pertains to our ability to recruit or for that matter any firms ability to recruit the.
I think the heady days.
2016, 17 and 18.
Very very competitive marketplace for Brook recruiting are now behind us and I think all the firms are taking a.
I'm a bit more coherent approach to recruiting we aren't as well.
Great. Thank you.
And your next question comes from Lang.
No.
On Morgan Stanley .
Thanks for taking the question just wanted to drill into just to capital markets and leasing businesses and in both the Americas.
And in EMEA, and maybe more so just a leasing business I know timing always it's tricky, but apart from just just comps which were tough I know is there anything specific going on in both those regions.
Leasing was down 17% in EMEA and a 9% is there anything else that you noticed apart from this tough comps.
Well I think you gave me a specific way is very much driven by the UK. It's no secret anybody that the UK is a very tough marketplace right now.
I'll restate, what I, just said a moment ago, which as we expect our leasing revenues to be up year over year over a very difficult comps. So we feel good about.
The big picture, a in leasing, but you're right there from the UK Uva, it's a tough place right now in transactions are reflecting that in that jurisdiction.
Back in Americas, commercial and good growth.
Okay fair enough that I would point it particularly to rights are you stated you know the immediate leasing was down 17%. That's in dollars. So one to the thing I mentioned that has impacted Europe is currencies as best probably to look in local currency growth rates and it's still down quite a bit but it's any factoring in the quarter.
Okay Fair enough and then just maybe.
Another.
Another question on just the guidance range <unk> EBITDA, you know you're you're through kind of early November now and I know, it's always stuff to figure out which transactions are closing I'm, assuming as you've referenced it's a timing issue from three Q2 for Q, but does the fact that you've kept the guidance range intact and maybe not.
Narrowed it.
A reflection of the uncertainty around whether transactions. It flows in Fourq, you and maybe not get pushed out to next year.
Well I'm just I'm just I'm just.
I'm wondering maybe <unk> at this point like why not narrow the guidance range right. So this is Brad I'll take a shot at it and then I'll, let Duncan add what what he will so our.
Our approach to revisions of guidance is that we will provide revised guidance. If we see anything that causes a material change in our guidance range, we're not in the practice.
Narrowing the guidance range at the end of third quarter.
So again, if we see anything that would materially change guidance.
We would tell you and we don't Duncan anything you want to add to that are you pretty much onto did I don't think you should into too much from the guidance range staying the same means that we have like more uncertainty and transactions than we had before I think you see more as a reflection of.
There's really been no new news on that for the guidance May just stayed the same if that helps you in doing so.
Okay. Thank you.
[noise] enter next question comes from the wine Sanchez from credit Suisse.
Hi, guys I'm on for Doug today, well you guys really touched on this but I just wanted to go back to it. So you talked about the stable leasing environment. Despite the macro headwinds.
Are there certain macro areas that you're more concerned about adding volatility to certain service lines and geographies.
Oh, it's a good question I as I mentioned before I.
I think the UK has been.
A jump ball now for some years and the resolution of the specific issues in the UK around Brexit remains somewhere down the road.
And as our head of a former head to be Indiana, President John Force or told me any resolution is a good resolution at this point.
We think that would be when it occurs probably supported to the marketplace, but certainly a political issues in the UK.
Continue to be a headwind that have not gone away.
At the moment, our folks in greater China.
Believes that the issues in Hong Kong.
Are probably not a structural and long term as it pertains to transaction volumes, but certainly a headwind at the moment and so we're watching that.
Quite carefully and up and then we have to find which was global trade issues, which remain in the marketplace. I think most folks expectation is that there will be resolution of some sort of between the U.S. and a in greater China in the near to midterm and that would be supportive.
The marketplace as well.
Okay. That's really helpful. Another on for me you.
You guys talked about fifth wall partnership last quarter, just interested in hearing about the integration of recent technology, and where new opportunities might come from.
Sure. So let me just remind folks on the phone that we look at technology first and foremost.
As.
A enabler of growing margin and creating efficiency in the business second we look at.
Technology as a tool.
For our fee earners in our revenue facing.
Employees to use with financing to differentiate our or services to clients and our relationship with fifth wall really drives both of those the efficiency side.
As you know we've spent a lot.
In prior years on building, what we consider to be a best in class technology infrastructure in the firm, we're very proud that infrastructure it is paying dividends.
As we speak.
Pertains to.
The client facing technology fits all its been a great helping that ALC has met a prompt and both those firms help us screen.
Technology technology firms in the marketplace that we might be able to use.
In our business and we are actively engaged with both those firms on a daily basis.
Looking at ways to further differentiate the firm with clients and to create more efficiency within the business.
Awesome color. Thank you so much.
And your next question comes online Mitch Jamie Fenqi.
Pete JMP Securities.
Hi, how are you I'm just.
In terms of the EBITDA margin I know you I guess you suggested you'll have some accretion on the full year.
I think you're down about 50 50 basis points, you know so far I guess, you're implying a pretty notable pick up in transaction activity is that the way we should think about it in the fourth quarter.
Hi, Matt should set down can you talk about and maybe popular said earlier and I think as you can tell the EBITDA in the fourth quarter growth year over year is gonna be quite significant right. So qs sized element to that I'm, obviously, the pool of quotes from a margin point of view is it more heavy.
And volume so it tends to be that the best quarter from a margin point of view, so that will close and pick up the.
Investments you made the second half of last year will be accretive to EBITDA, which they've not been yesterday, which is gonna be a a drive up margin and then the yearend accruals that we saw last year, which we won't necessarily see this year things like bonus accrual I'm going to be quite accretive to margin too. So.
For the point of view, what's Gonna drive EBITDA, there's going be similar things what drives margin margin year to date is being driven by the investments which won't be that in the fourth quarter.
And there's been driven by the shift to Pms them and you know there's a much more transaction rich environment in the fourth quarter. We've guided that we expect transaction volumes. If you like brokerage revenue globally to be in that sort of low single digits for the year as it has been year to date. So no one else amazing that there's going to be.
Saturday Big growth that.
Hopefully that was.
Fulsome, that's right that's very helpful. The increase in the transaction activity among the ER professionals that had been recruited is this based on pipeline that your confidence is increasing or is there anything else that that's driving that change, though it to be on.
It's it's driven by the fact that you know when you high brokers focus by the nature of mobile MAU accretive in terms of revenue in the fourth quarter, just like that that's the nature of the brokerage businesses much more heavy to the full cogent is to the only three so as they ramp like in a ramp in that first year heavily into full quota almost by definition access that that's that's over a number of brokers that that's.
Transaction activity is the highest.
Gotcha, and then Brett I I'm curious about your thoughts about M&A, it's been I, obviously fairly robust started the year and things are quieted, a little bit and I'm curious if there's been is it maybe a lack of appetite from you guys to just kind of organically de lever.
Is it pricing is it just the population of a you know transactions or firms that are available anything that's kind of.
You know impacting your decision to deploy capital here sure first at well. It's good question first of all I just to remind everyone.
The QSR transaction was a sizeable so in one transaction we.
We did a lot.
Ah that infill M&A will always be lumpy.
For all the reasons that you you would expect opportunities remain in the marketplace. We are.
Engaged with a number of those but when they close is never predictable.
But I would say that you should expect.
That each year.
Going to be pretty active in the infill market as you know we have.
Abundance of liquidity on the balance sheet and much of that is earmarked for accretive infill M&A transaction.
Right can I sneak one more in you mentioned Q aside I am curious about.
Cross sell opportunity, there and a if his and even realized and.
And you know how do you potentially make that materialize.
You know given the fact that Oh, I'm, assuming that introduce you to potentially some customers that werent using a platform before.
Sure well I think first and foremost.
Any acquisition, we make by definition is going to be integrated into the greater business.
And that integration should drive a in the midterm and long term some pretty decent cross selling we don't leave them Standalone, we put them into business and so they are managed by or managed with.
Shifting business lines here for Q aside in particular, a goal number one.
On that acquisition this year was to get it bedded down that's done.
It's performing quite well.
Certainly up to our expectations for the business and I would expect that we will see cross selling from Qs site in into Q aside.
As.
The quarters unfold. It's early days there I couldn't tell you because I don't know.
How much crossline has occurred a year to date, but I think that's something we would look for in subsequent quarters.
Thank you.
Thank you there no further questions at this journey.
Now I'd like to turn the conference.
Back to management for closing remarks.
Thank you very much thanks, everyone for your time by this afternoon to see me look forward to talking to you at the end of the fourth quarter.
Yes.
This concludes today's conference call you may now disconnect.