Q2 2020 Cushman & Wakefield PLC Earnings Call
Welcome to Cushman, and Wakefield second quarter 2020 earnings conference call.
I've been pleased Sunday's Superman any background noise. After the speaker's remarks, there will be a question and answer session. If you watch I say question. During this time simply price Sars follow my number one on yard telephone keypad. If you will like what's your your question I see pounds <unk>. It is now my pleasure to introduce.
Latest texter head of Investor Relations and global controller of Cushman and Wakefield. Mr. Takes there you may begin your conference.
Thank you and welcome again to Cushman and Wakefield second quarter 2020 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 Dot Cushman Wakefield dotcom.
Please turn to the page labeled 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 will refer to non-GAAP financial measures as outlined by FCC guideline reconciliations of GAAP to non-GAAP financial measures and definitions of non-GAAP financial measures are found within the tables of our earnings release, an appendix of today's presentation.
Please note that throughout the presentation comparison and growth rates are to comparable periods of 29 team and our local currency.
For those of you following along with our presentation. We will begin on page five with that I'd like to turn the call over to our executive Chairman and CEO Brett Wise.
Right.
That's why I'm and thanks, everyone for joining our call today.
Before I start with a brief review of our second quarter performance, including some color by region and service line.
I wanted to let you know that we have a flight revision to our agenda today.
And if I didnt, Kevin for our Chief economist to join US today to provide some commentary.
On Cobot night teens macro impact.
Following Kevin's comments I'll add a few final flock in our positioning and outlook and then turn the call over to Duncan to detail our financial results for the quarter.
Before we dive Dan I would like to extend a heartfelt. Thank you to our team of Cushman and Wakefield professionals around the world.
It goes without saying that these are unprecedented times.
And our employees perseverance.
Creativity and service to our clients continues to go above and beyond.
And those would continue to support frontline operations through the heart of the pandemic.
That is delivering new an unprecedented solutions to our clients.
I continue to be extremely proud of how are people have risen to the occasion.
When it matters most.
So with that let's begin.
As you saw from our press release, Cushman, and Wakefield reported second quarter fee revenue of $1.2 billion.
Which represents a 24% year over year decline as a result, other cobot 19, Pandemics economic impact.
I will touch on these seems more in a minute.
Well the global operating environment remains very uncertain.
Revenue for the quarter was better than our expectations.
In the face of these challenges we were pleased to report second quarter, adjusted EBITDA of $119 million, which represents a reduction that $56 million from 2019.
Have you may recall from our last earnings call.
We are modeling full year 2020, decremental margins in the mid 20% range meeting.
Production in EBITDA.
Divided by the reduction in revenue.
In the second quarter.
This decremental was 14%.
This good performance in the second quarter was principally driven by decisive cost management actions taken prior to the corporate 19 pandemic.
As well as tight cost management of discretionary items and other variable cost savings.
In the second quarter, we delivered more than $75 million cost savings.
We are on track to deliver annualized cost savings of about $400 million by the end of 2020.
As you know these costs decisions are never easy.
But we firmly believe.
There were the right ones for the business and pose no material risk to future growth.
Beyond our actions to optimize profitability.
We also acted to reinforce our balance sheet and expand our liquidity.
In May we issued $650 million a senior secured notes.
Which mature in 2028.
Despite our strong liquidity position before the debt offering.
We took the opportunity to raise additional capital to ensure our financial flexibility and to take advantage of infill M&A opportunities.
That may arise during the coming quarters.
As many of you know in this industry.
Differentiated real estate surface platforms do not tend to trade hands often.
In times of stress the market for those businesses can provide generational opportunities.
And Cushman and Wakefield is well positioned to take advantage of these should they arise.
At the end of the second quarter, we had $1.9 billion in available liquidity.
Before I speak to our service lines in regions.
Let's put this current environment in contacts.
I think most of US would agree that the impact to cover 19 is unique and.
Certainly different from previous recessions, such as the great financial crisis.
However.
While the shape of the recovery may differ from the GFC.
In the second quarter, the initial impact of Cobot 19 presented similar behavior in our industry.
Especially across our leasing in capital markets brokerage businesses.
With that said, let me begin with the performance of our leasing business over the second quarter.
Leasing fee revenue was down 45%.
Which was consistent with our expectations based on what we saw in March and April.
As I said this dramatic pausing client activity reflects similar behavior to what we've seen in prior recessions.
Intends to be reflection of deferred decision, making.
It is too early to know what the ultimate decline in demand will be and let me explain a bit more.
Historically in the early stages, the most downturns almost all occupiers facing a leasing renewal decision in a market shock do you want to two things.
They either delayed that decision as long as they can.
Well they try to agree with the building owner to renew on a short term basis.
I mentioned, this because roughly 75% of leasing activity.
Represents existing tenants with expiring leases.
Yeah and.
Based on our experience there are typically short term impact on the PC those revenue driving decisions and the early days of the crisis environment.
In our capital markets service line fee revenue was down 52%.
In terms of capital markets observations I'll offer two points first.
We would emphasize to what we're seeing today is much different.
What we saw the great financial crisis, where debt markets froze because of the systemic credit crunch.
In the current environment debt markets remain relatively healthy and open.
Both because of healthy balance sheets, pre covet and because of the dramatic influx of liquidity from central banks around the world.
Second regarding property type.
And risk tolerance.
If you can imagine there is a wide range of views on risk between an industrial warehouse that is facilitating E commerce and a hotel on close mall.
In general we believe the bid ask spread for those riskier assets will remain wider and cap rates may move higher.
As a result of cover Nineteens impact.
For industrial and multifamily assets that make up most of our capital markets service lines.
We believe the bid ask spread has more potential to revert and narrow as demand for long term contractually yield with solid credit.
Remains high in a world with low interest rates.
Finally, I will address RPM FM service lines, where we are pleased to see the stability, we expect needs contractual fee based revenue streams.
As a reminder, this revenue stream represents about half of total portfolio annually.
Throughout the pandemic our teams in these businesses had been directly supporting our clients.
I'm keeping essential buildings open.
Reconfiguring offices and retail outlets for social distancing.
And providing enhanced cleaning and specific facility services.
To ensure buildings are safe for their tenants.
In addition, our global Occupier services business continued to win new assignments and renew existing client engagements for outsourcing services.
As large occupiers continue to focus on operational efficiency.
Through down cycles.
With that let me now turn the call over to our Chief economist, Kevin Thorpe to give an update on how cobot 19 may shake the commercial real estate market Kevin.
Thank you Brett.
Let me start on slide six by sharing the latest U.S.G.P. scenarios from the various forecasting groups.
The general consensus is now calling for a sharp recession do occur in 2020.
Real GDP declined by an annualized rate of 32.9% in Q2, which is expected to be the trough.
In the sharp drop in Q2 is expected to be followed by a partial reap rebound in Q3 as businesses reopened.
Oh by a long period of gradual growth as GDP recovers to 2019 levels.
Of course, there's still many alternatives scenarios and uncertainty regarding the path of the pandemic actions needed to contain it but most economists now assume that real GDP returned to pre crisis levels sometime in 2022.
Next on slide seven.
As you know historically GDP has been a solid predictor for gauging the health performance of commercial property markets.
The intuition is GDP recovers the economy begins producing jobs again, which translates into more absorption more leasing more rent growth more inventory growth more properties to manage and ultimately more capital markets activity.
In many ways. It is expected at the path of the recovery in property will track very similarly to the path of the recovering economy, although this varies by market and by asset type.
However, the cobot 19 recession is clearly not your traditional recession.
Like the great financial crisis. This event will have lasting implication.
And we think about property. It is important to recognize that the cobot impact has clearly accelerated a few trend there were already in the making.
For example, as shown on slide eight.
E Commerce was clearly gaining market share over traditional bricks and mortar stores going into the crisis and we know that this trend was accelerated by the locked down and stay at home orders.
Commerce sales accounted for 16% of total retail sales in 2019 and that jumped over 20% during the cold and lock down period and has remained elevated.
We also know that this acceleration in online sales is boosting demand for industrial logistics space.
It is already nearly returned to pre crisis levels of absorption with occupancy rates hovering in the U.S. at approximately 95% in Q2.
Data centers Internet related real estate life Sciences real estate in the suburbs or other product types that are either already benefiting we're likely to benefit from secular shifts in accelerating trends.
Turning to slide nine so here, we point out that the U.S. office sector and the other hand faces more challenges. So let me spend the rest of my time on that sector.
First we know that the office sector.
Like most other sectors faces a cyclical and.
So that's the normal demand destruction caused by a sharper session coupled with the fact that the economy is not expected to returned to full employment for several years.
If the economy follows this script the impact of office using job losses will invariably translated to increase they can see in place downward pressure on rent.
That aspect of this recession is not unique the office sector has faced cyclical impact before and as always fully recovered back to pre recession levels of performance and then beyond.
But in this recovery office also faces structural impacts that are being accelerated by cobot.
The most surveys do indicate that because of this event the share of the population who will now work from home permanently go up and the share of agile workers or people, who work remotely at least some of the time will also go up.
And the mix of space that businesses lease in the central business district versus the suburbs will likely change for some firms.
Keep in mind. However that there is also one structural positive for U.S. office that started well before cold. It that partly explains why the office sector has been growing generally at an accelerating rate for the past 50 plus years.
Since the 19th Fiftys. The economy has been undergoing a structural transformation towards a professional services oriented economy.
In other words sectors that traditionally occupied office space have been increasing as a share of the overall labor market for decades.
And for reference in 1950, U.S. office using employment was just 14% of total nonfarm employment by 1990, it was up 18% and by 2019, it was up to 22%.
Over the next 10 years, one quarter of all jobs are expected to be office using implying that these industries will continue to account for a disproportionate share of future job.
Dots office has a very strong structural engine powering demand for space.
And this definition of office employment does not include government or medical occupiers, which are also sources of office demand.
Turning to slide 10, Cushman and Wakefield Research recently produced an internal study to measure the net impact. This event will have on U.S. office sector.
In this analysis in addition to the cyclical impacts, which I. Just described earlier, we made assumptions about the possible values key structural parameters may take driven by external academic research and surveys. So for example in our analysis, we assume the share of workers permanently working from home doubles over the next five.
Five years from 5% to 10%.
Further the share of agile workers again, those are folks who work at the office some days and remotely and other days that's assumed derives from approximately 40% pre crisis to 56%.
Importantly in our study we did not assume that due to heightened health and safety scrutiny businesses would expand their office footprint per worker, even though there are anecdotes that is in fact happening there isn't enough evidence to suggest this dynamic will persist in the aggregate over the medium term. So we left there.
Aspect out of this phase burn out.
So if anything it could be argued that we were overly conservative with our modeling assumption.
But if we word error, we wanted to err on that side.
The study pretty is two key findings.
First in the baseline scenario U.S. office vacancy will rise from 13% in 2019, and we'll talk about 18% in mid 2022.
Higher vacancy rate will put downward pressure on rent until we estimate that asking rents well declined by 10% to 15% peak to trough.
The second key finding is that office will in fact recover.
The structural shift I have described the laser recovering office by 12 to 18 month versus other typical recessionary recovery periods.
But demand for office space does turn positive in the back half of 2022 in Vegas. They can see begins to trend downwards.
Turning to slide 11.
We show independent analysis from Moody's analytics, which indicates that and their baseline scenario U.S. office property prices fully recover by the end of 2022.
About one year earlier than that in their upside scenario, one year later than that and or downside scenario, but again in the aggregate in all probable scenarios office does in fact fully recover.
Some of the factors that points to a full recovery include that the economy will continue to grow.
But there will continue to be population growth.
The office employment continues to penetrate broader nonfarm employment.
And that businesses will need to put at least some portion of their workers somewhere other than their homes. These trends. In addition to the agglomeration factors knowledge spill over and value creation factors mental health cultural and branding mentoring and training and worker productivity factors suggests that office real estate.
We'll continue to play a vital role and the way organizations working grow.
We also considered a latest surveys, indicating that 90% of workers actually do we want to go back to the office, but was it changes, namely more flexibility.
So all these factors taken together indicates that the office sector will continue to play an important role in the economy.
Bottom line expect a slow uneven economic recovery and by extension a slow uneven recovery for property.
When cobot does go to the rear view mirror I would expect there to be a lot of movement, which will spur transactions.
This event will undoubtedly launch a flurry of new real estate strategy.
Some businesses will rethink their office footprint symbol want more space in the suburbs must downtown some investors will relate their portfolios maybe go heavier on industrial lighter on office.
This event will undoubtedly create a lot of opportunity to reinvent real estate convert or Reimagine malls obsolete office buildings hotels movie theaters fitness centers convert these things into things that the new economy me.
And with that let me turn the call back over to Brett.
Thanks, Kevin that was terrific very helpful.
Now let me offer a few final thoughts on 2020 and our strategic priorities.
First as I mentioned earlier, we can do you expect to achieve our previously communicated annualized cost reductions of $400 million by the end of year.
Second.
Based on this we continue to model decremental margins in the mid 20% range for the full year 2020.
While our second quarter performance was welcome. Please keep in mind that second half of your is typically seasonally stronger.
<unk> revenue perspective.
And we expect the second half of 2020 to be no exception.
Albeit below last year's revenue of course.
Third our planning for operational efficiencies started well before Kevin 19.
I mentioned that owing to give you a better perspective on how we're thinking about costs in a range of possible recovery scenarios.
Building on this work we believe there are opportunities to eliminate additional cost permanently.
Above and beyond what we have already identified in late 2019.
And early 2020.
And we are planning a variety of initiatives to add more permanent savings in 2021 and beyond.
With that let me turn the call over to Duncan Duncan.
Thanks, Brett.
Good afternoon, everyone.
Before covering our second quarter results I wanted to add a couple of items to walk Brett already mentioned.
First our financial position is strong.
We were pleased to raised $650 million in a bond offering in may but eight year maturity.
Which further enhances our financial flexibility.
We ended the second quarter with $1.9 billion of liquidity.
Consisting of cash on hand of $876 million under revolving credit facility availability of $1 billion.
We have no outstanding borrowings on our revolver.
Since the IPO, we have managed our liquidity position to ensure strength and flexibility through the entire cycle, including an economic downturn.
With that full view part of our liquidity as available to fund investments such as infill M&A in a consolidating industry.
We have no significant acquisition targets at this time stand ready should opportunities present themselves.
Second cost actions.
Our first quarter coal, we announced that we were taking significant cost savings actions targeting about $400 million an annualized savings by the end of 2020.
These actions include permanent cost savings announced in March focused on driving operating efficiencies in both employee unknown employee costs. In addition to $400 million includes a significant reduction in travel and entertainment and events, which you spend on third party suppliers lower.
Annual incentive compensation in position to fellows, and part time work schedules and impacted businesses and executive and stock compensation cuts.
As a result of the excellent focus and execution of our teams globally, we generated second quarter cost savings of more than $75 million as we indicated on off first quarter coal.
This increases our confidence in the annualized cost savings of $400 million for the full year.
Also in addition to cost reductions included the $400 million variable costs are expected to decline as a result of lower revenue across different service lines and geographies.
These reductions include broker commissions Fianna profit shares direct client labor and materials on third party subcontractor costs.
With that backdrop on page 13, we summarize our key financial data for the second quarter.
Fee revenue of $1.2 billion was down 24% as compared to last year.
Stability in our P. M. M service line helped to temper the impact of declines in our brokerage and valuation another service lines.
On bonds fee revenue for the second quarter was slightly ahead of our prior expectations based on what we've seen in March and April.
Second quarter, adjusted EBITDA of $119 million was down 31% as compared to 2019.
Turning to know a brokerage fee revenue.
The impact of this revenue decline was partially offset by the impact about cost reduction initiatives.
Decremental margins for the quarter were 14%, which represents strong execution.
Moving on to pages, 14, and 15, where we show fee revenue by segment by service line.
Overall brokerage revenue was down 47% for the second quarter.
Leasing in capital markets service lines were down, 45% and 52% respectively for the quarter.
Declines were experienced across each of our three reportable segments with relatively better results in leasing in EMEA and APAC.
We're activity for the quarter declined, 25% and 27% respectively.
Helping to partially offset these trends with the stability, we experienced in our Pn FM service line.
Within P.M. FM facility services represents just under half of the fee revenue.
In facility services, we typically self the full more 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.
On annualized basis, typically has low single digit growth.
Excluding the impact at the deconsolidation of the China JV executed with bunker earlier this yet a P.M. FM service line, which includes a facility services was flat year over year.
With that we will start to a more detailed review of our segments starting with the Americas on page 16.
Fee revenue in our Americas segment, it was down 27% for the quota leasing capital markets and valuation another were down 51%, 55% and 15% respectively.
These trends were partially offset by P.M., FM, which was up low single digits for the quarter.
The non Americas PFM service line facility services operations represent a little over half of Buffy revenue.
Facility services fee revenue was up low single digits from growth at existing clients and new business wins.
The balances PFM service line portfolio was also stable for the quarter.
Americas' adjusted EBITDA of $54 million was down year over year, primarily due to the impact of lower brokerage revenue.
Its impact was mitigated by the various cost actions taken.
Moving onto EMEA on page 17.
In EMEA fee revenue declined 8% for the quarter leasing and capital markets were both down 25% and valuation another declined 11%.
These declines were partially offset by double digit growth in our PFM service line, which was up 16% the quota.
Adjusted EBITDA of $26 million was up $11 million or 75% versus the prior yet at the impact of cost reduction initiatives more than offset the impact of lower fee revenue a quarter.
The transactional seasonality of the brokerage service lines, particularly pronounced effect in EMEA with much of the segment's EBITDA each year typically occurring in the fourth quarter.
The cost actions already taken in EMEA to offset the anticipated full year drop in revenue.
With respect to produce.
No I decrementals in the second and third quarters, offset by reduced brokerage profitability and higher decrementals in the fourth quarter.
Now for Asia Pacific segment on page 18.
The revenue was down 28% principally due to lost consolidated PM FM revenue associated with joint venture in China with bunker surfaces without this effect fee revenue would have been down by 19%.
Leasing in capital markets were down by 27% and 59% respectively.
Capital markets was down primarily due to slow down in a tough activity in Hong Kong.
PM FM service line represents roughly two thirds of the fee revenue for the segment.
Adjusted EBITDA of $39 million was up 10% for the quarter as the impact of cost initiatives more than offset lower brokerage revenue.
Turning now to page 19.
In summary, cobot pandemic has disrupted global economic activity on an unprecedented scale.
The near term business outlook can.
Remains highly uncertain and we continue to have limited line of sight to revenue trends, especially in our brokerage business.
As a result, we believe that brokerage activity overall in the second top of the year could be broadly consistent with the trends we experienced in the second quarter.
Seems a percentage of comparable 2019 revenue.
While we believe that that will be a recovery over time.
Shaken speed at this recovery a difficult to predict.
We still expect top PM FM satisfying to be relatively stable. During 2020 as a reminder, these businesses represent roughly half about total revenue in any given year.
As I said on our first quarter cool, we're modeling adjusted EBITDA to decline as a percentage of fee revenue as a decremental in the mid Twentys for 2020 as a whole.
Within this full year assumption, we expect decrementals in the second and third quarters to be lower than in the fourth quarter, largely driven by the seasonality a brokerage revenue and profitability.
We generated more than $75 million of cost savings in the second quarter and this resulted in a 14% decremental.
We are on track to $400 million, an annualized savings by the end to 2020 with temporary cost reductions. In addition to the substantial permanent savings announced early this year in March.
Given the uncertainty at the speed of recovery in revenue, we are developing plans to add more permanent cost reductions with an impact in twentytwenty wall and beyond.
This will be achieved by converting some of our temporary actions to permanent and by targeting more operating efficiencies across our global businesses and support functions.
As you know we have developed a rigorous approach to scenario planning and the relentless focus on sustainable margin management.
You can expect this focus to continue.
As Bret set you can be confident that whatever cobot pandemic outcome.
Economic impact we will continue to focus on the wealth of our employees supporting our clients the financial strength of our company and our profitability both in Twentytwenty and for the long term.
With that I'll turn the call back to the operator for the Q in a portion of today's call.
At this time and quarter to ask your question. Please press star.
Sorry, followed by the number one on your I pod Hunky Pat.
Again, we ask that you limit your questions. So my question.
And your first question comes from the line Stephen Sheldon with William Blair.
Hi, Thanks, and appreciate the commentary any great data points, Kevin notes as really interesting.
First wanted to see if you can talk some just generally about producer headcount at in both leasing and capital markets. So far this year.
Cost saving hit any of the producer numbers and then I.
I guess a longer line, but that's not the case.
Are you thinking about sequentially, even the slower environment to be opportunistic from the on a strategic hiring from.
Sure. So first on the producer headcount producer headcount both in leasing in capital markets brokerage is about flat to what it was yearend 2019.
Which is what we would expect there's not a lot of movement in the industry in times like these and also I think that.
There was an awful lot of movement based on a merger that occurred with two other firms.
In the industry last year, which I think took a lot of the.
Steam out of the movements system.
Strategically as Dunkin' as mentioned before we have an enormous amount of liquidity on our balance sheet. Some of which is specifically earmarked for opportunities that may come to us in this environment those opportunities would include.
Highly productive fee revenue.
Personnel.
The keep in mind that the majority of our brokers are commission paid which means that rarely would we remove a broker to save cost because they really don't cost us much at all incremental costs of the broker in an office is very very very low.
And we want to make sure that were well staffed when the market will turn which is going to do I'm sure they're not too distant future. So are you know our cost efforts occur elsewhere, and so I'll start with that Doug can you think wanna add to that.
No just just reemphasize, what you said, which is our cost savings did not include any.
Auction broke a force that wasn't ready isn't any part of the cost savings at all.
Got it it's helpful and then Pms and can you talk about trends so far in that business.
And then at that in terms of client retention, there and the boost from new business on anything notable to thought in terms and the weight of course out of activity in the quarter.
Sure.
Interestingly in the PFM business line, we're not seen any slowdown.
In activity, but let me tell you what what we have seen which is what you would expect.
And it's certainly in March and April and May.
Maybe a bit less so in July.
The client side is not going to switch providers until you know other issues, they're dealing with like how to get their employees out of the offices now to because employees back in the off so that those issues are dealt with so I would expect in its true that.
Attention across the industry PFM clients right now is probably darn close to 100% I would be quite surprising if it wasn't.
But as I mentioned, there's lot of activity going on so there are RFP is a number of them in the market.
Quite sizable arent piece for both PM enough them that we are pursuing we did win.
A couple of very large U.S. based property management portfolio assignments.
Right and the teeth acos.
And we were quite pleased to have those come in but I would say there is no bad news whatsoever in the PM FM World. It is we've talked about before and I know you notice.
Those businesses tend to do well in markets such as these and I would expect that the longer the market stays.
Down to better they're gonna do.
Makes sense. Thank you.
Okay and your next question comes on the line of Anthony problem.
Hi, Thank you and good afternoon.
Was wondering Brad if you can talk about.
It's early August here, with what regions or business lines or property types or however, you might want to characterize it are you seeing coming back sooner versus not as we sit today.
Well if you look it's a great question and it's it's one that we were asked all the time and.
First of all.
Every recessions different they haven't for different reasons and.
The differences in recession in terms of caused.
Or causation matter in terms of what business lines come back first let's start with what's obvious.
The PFM business lines do well in this recession. So there's nothing that come back from there they're going to continue to do well.
Our facility services business are very large janitorial engineering businesses is killing it right now as you would expect.
Snow on the mountain for down lots of extra work, they're doing their profitability shows that we don't break that out but suffices to say they had a very good.
Quarter.
The valuation business.
As a business that depending on the reasons for the downturn need to do real well are real poorly this downturn isn't really a capital markets seizure and so the valuation business.
It is in good shape, and I really not a lot to come back from there either so what we're left with is really leasing.
And capital markets brokerage as Kevin mentioned this this downturn is less about a credit issue or credit seizure and more about health issue, causing a a lay off of employment. So from that what I would say is the recovery is likely going to be signaled by two thing.
We're going to start seeing a pick up.
In lease Trent number of lease transactions not necessarily duration of term, but number of lease transactions and we should see coincident with that are very shortly thereafter.
Pick up in the capital markets business capital markets business, what what needs to happen there.
Only needs to happen there in this particular recession, if the bid ask spread to narrow.
As Kevin mentioned in his comments the bid ask spread is isn't very good shape on certain product types multifamily industrial.
But it's still fairly wide and office.
Leisure its retail and so as soon as buyers and sellers begin to see the world. The same way sellers will be forced to capitulate to some new valuation we by the way it Kevin mentioned, we don't expect to see a large re.
Evaluation of commercial property values are very low interest rates lot of reasons why why the properties or is desirable today's everywhere, but there is some.
And I think that you'll see both of those leasing capital markets begin to improve roughly around the same time keep in mind.
That there are a significant number of lease transactions that in normal course would have occurred March April May June July didn't.
Because as you heard and the comments.
Tenants the first thing they do it the early days of the crisis, it's just stop and they're going to defer signing those leases as long as they can or until they think the market is settled out but.
They can only do that for so long because they have a lease expiring. So there's a every month that you see lease transactions down more than 25% plus or minus no that the incremental above that is likely simply a deferred transaction that is going to come through.
And we'll have to come through at some point probably in the next 12 months.
Okay. Thank you for that occurred.
Second question is just.
And our R&D costs to achieve somebody savings that you all did I think originally at the outside of the year. When you put forth. The new operating platform plan I think you outlined $40 million to $60 million to get that Don but it looks like you had about 70 here in the second quarter just wondering.
What that looks like you know, it's kind of get that whole 400 million and then maybe even what yes beyond that.
Sure Duncan.
Yeah, so lets us break that down a bit set up the pembina cost saving actions that we took earlier in the year that we announced earlier in the thing we announced a restructuring reserve a gap restructuring reserve, which I think as you say it was right was in that 40 to 60 range. The all in cost of getting all that money out that does permanent savings coming in north of $100 million in.
Runrate full run rate terms, so the weeks, but it was that the cost to achieve to be best part of one times that typically that's about what it is so that pembina cost program I think of it being full run rate, which was certainly be achieved by the entity yeah.
You know full run rate as we as we go into next year 100 million built 100 million, but the cost to achieve say one times. So that's what that is tempered sort of both the more temporary cost reductions the other cost reductions in that 400, where do you don't have a big cost to achieve because a lot of them and not then all the same kind of cost savings and I'll like big severance programs, a process savings and stuff like.
So there really isn't a huge cost to achieving a love that but relatively small something on a restructuring was we are focused right now as we said on taking a look into 2021 and beyond I'm, putting in bowl programs in place as we said to take more permanent cost out.
Through a variety of products and programs that we're putting in place, which we expect to have an impact in 2020 on the beyond that what we would expect to have that I have a cost to achieve associated with it too early to say exactly what that would be it would depend on the size and nature of the cost that we take out I'm not cost to achieve a part of being could yeah, maybe next year.
But but too early to say exactly what that would be.
Okay, but that that 40 to 60 to get that hundred million a permanent.
Cost saves that somewhere presumably in that 70, and a half million dollar line item that you shared in the second quarter I mean, it gets and it was not all in the second quarter in other quarters, but that's where happy in them.
No it's going mixing mixing stuff out right study the department of cost saving of 100 million Bucks I expect the cost to achieve all in for the 100 million bucks to be about 100 million Bucks.
My Olin ramp that's a cost to achieve right Oh man the cost savings in the second quarter of more than $75 million is both permanent cost savings recorded in the second quarter and the more temporary cost savings also recorded in the second quarter.
If that makes sense.
Yeah.
Yeah, I think I I was just talking about the add back like for for Oh, Yes.
Yeah, I guess somebody but yeah. So they are back is mainly the cost to achieve associated with achieving $100 billion. So just maybe a cut in the second quarter.
Okay. So that should go down in the next couple quarters.
Yeah, Yeah, yeah, most that cost as bina.
Would it be booked either late in the little bit late in the first quarter all booked in the second quarter.
Perfect Great. Thank you for that.
Operating cost our operator, operator are there any more quest.
<unk>.
Yes. Your next question comes from the line.
Harder with credit Suisse.
Thanks.
Is there any visibility you can give us into kind of conversations you're having that you know that that might ultimately lead to leasing activity or capital markets transactions, even though you know kind of you don't know when that might happen the bid ask might narrow, but no just any sense of kind of the the pipeline for us.
Yes for when those markets moving up.
Sure well, let's let's be clear they haven't they haven't completely shut down so there's still an awful lot of activity going on in the leasing side of the business and you know.
Way down from last year, but still a lot going on right now.
We closed a very large lease a very recently with the dairy big tenant.
And as lease I think that was discretionary for them. They could have put it off they didnt and it was multiple hundreds of thousands of square feet in office.
So you know maybe the best way to describe it is.
So far.
May was the worst month.
When you compare year over year monthly.
For revenue and I'm, not saying that may was necessarily the trough, but.
But it was just just the data as it was worse than the other mines on a comparative basis year over year.
And so one could presume that we're beginning to see the green shoots of.
Things that were deferred or shut off.
On March April may beginning to.
Be seen again Ah, but there is that there's still a considerable amount of activity in the marketplace lots of RFP is out in the marketplace.
I think work for the leasing inside the business.
I think we're going to see.
And we are already seen a change of the nature of some leases to be shorter term Dan.
Typical.
You might see tenets doing a lot of different things might see sometimes going suburbs with some of their space you might see.
Some tenants just moving forward like they always do but I think.
Answered questions specifically there is a good amount of activity the market as we speak, particularly the leasing side.
On the RFP data and just anecdotally, what we hear is that folks feel that.
Probably.
It's not it certainly makes it that's what we said we don't see any signal that things are getting to get worse than they are now.
And I think Conversely were probably.
Seen some very very early signals that perhaps.
You know may was the worst it but that being said, we can wake up in September and it could be the worst month. So far it's just very very difficult to tell right now, but I would not characterize the market is dead.
I appreciate it thank you.
Thank you and your next question comes on the line of the car Mahalo trial.
<unk> Morgan Stanley.
Thanks, so much I'm thankful that Carter I I've a couple of questions can just bear with me.
Maybe just one really quick one for Dunkin' again in the add back.
There's about a nine cents other.
Add back can you give us some color what that other it.
The other add back.
Oh, the other add back because it's a nice label as other.
5 million Bucks the other one.
No I think it.
Okay, then a bigger table on page 23, and seeing 5 million Bucks the other one you're referring to.
No in when you go to get to adjusted EPS, I think it's a 20 million or.
Or so.
I'm looking at what I'm looking at the slides here.
And then maybe you can help me, what kind of which slide right. Okay sounds like based on looking at the right number.
I was just looking at your press release, sorry to me once I cannot stand do the I'm sorry about the slides in front of late.
I can I can I can I can come back to that but it speech 24, I think Oh, I think I think you're probably referring to it if I get it right and maybe letting you can follow up make sure I got it right, but I think there's a I think you're referring to the to the.
Someone's going to onetime costs associated with Kobe during the quarter right. We had some one time expenses associated with coverage. We added back maybe I think we disclose that it is about 12 million Bucks to me, let yes. It's okay. So here. It is it's in your it's in the or.
That's in your Oh aren't in your press release, where it says other $20 billion to get to adjusted net income of 417.
I can follow up with you I think I think the major why to reflect that are the main driver I think the major item in there.
12 million Bucks.
Right Okay.
Okay, Great. So then maybe just.
Bigger picture question, I guess, you referenced sort of thinking about the backup back half of the year.
As sort of similar in terms of declined versus 2019, but I'm just sort of curious.
The fourth quarter tends to be the big walk up all the brokerage is and they're probably even bigger deals.
That get done in that in that quarter, though it's probably obviously states, but some of these bigger deals that gestation periods up fairly long.
So I'm just curious how we should think about.
You know just the back half of the year being down similarly, but could there be a difference between the card in the fourth quarter do you think about year over year.
Changes from the top line perspective.
Glad Duncan.
Yes, Okay, it's very hard to tell right. So we we.
We don't know intend to year over year is exactly what the back half of it was going to leave us as the front top I think.
When we came into the quarter, we saw a pool and we said April was down right about 40%, we China you know at a theory about what the quarter might look like as Brad said I think as so many months. So far may was the worst right in terms of due on your decline June July maybe talk a bit better on other hand, as Brad said, we could wake up tomorrow find out that you know trends.
It was that temple it was right we're not when it epidemiologically driven wells here. So it's hard to tell right I think as far as we can tell now we we don't see getting a lot worse right, but they said the full of course, the big quarter I'm on the other hand, so we'd expect the seasonality the age of repeat we still expect.
Of course, we pick in the second and and the said right, but that full but we are but I think tens or the decline as we see it now we don't see it obviously getting a lot worse, but and some reasons in some areas I think it might be a bit better, but it's it's very uncertain. So in response to that I mean, that's kind of why what kind of Brady moving at this cost.
Activity, so strongly right we want to make sure that we can flatten the kind of a bit in terms of the impact to hasn't overall profitability by being aggressive and decisive on cost and so no matter what the outcome in terms of in a range of revenue that might be.
You know we were able to achieve this sort of mid Twentys Decrementals, which is what were trying to get you for you.
Okay. There are lots and I'm just last one.
Okay, all right long Atlanta, So I'm sorry go ahead.
Oh go ahead go ahead.
So maybe just last one Brett you've talked a lot about you know white space over the last few years and nearly in recession that you alluded to there are opportunities that come up some how much are fairly large.
Assuming there are multiple opportunities in different practice groups or a different geography can you can kind of maybe mary or that you want your ongoing kind of decide fill up that while the it's worth it.
Maybe where you might take advantage over the near term of opportunity that to present themselves.
Sure.
So we are our priorities for capital allocation remain unchanged and.
The state what you already know the highest return on capital for us or cost saving initiatives.
Dunkin spoken quite a bit about those that are in place right now broker hires I have a very high return to us, although the revenue lags a bit but.
I would say that both with broker hires and with a M&A. The food groups that are gonna be the most hammered our capital markets. So if you're a.
Small boutique brokerage business that does just investment property sales. This is not a very good world for you and some of those firms are going to how serious issues.
So that's an opportunity that we're watching.
Closely.
There are a in an environment like this you may find that other businesses non transactional for whatever reason are occurring and may come to market and we're watching for those and then you have businesses that are doing just fine.
They are moving forward with there.
There are pulled their strategic plan right now and we're talking to a number of infill opportunities that we were talking to a year ago. Some of them in a brokerage space, we've we've repriced down significantly.
What we're willing to pay for them and some of those firms are understand that enter okay with it but they really need to trade others are just going to go away and wait for for better days.
So in the brokerage business. We're seeing you know there is some activity. We are in discussions as we always are nothing different now than what it was a year ago, we're always in discussions with lots of.
Wants an infill opportunities.
But as I mentioned, I think I think that the food group discounting going to be the worst stuff I guess, the I can add to that hospitality and lodging. So.
Businesses that focus just on those things or just investment property sales.
Did their total revenues or are down 60%.
That's a that's a hard place to be and so we'll watch that's currently.
Thanks, so much and Kevin Thanks, so much for all the existing inside I haven't done a question. So I thought I just spoke with you at a later time well supported but thanks a lot.
Sure no problem. Thanks.
And your last question I'm spending a line of Michael Fine with Bank of America.
Hi, Thanks, I keep the question guys and thanks for the details as well a few quick ones if I could so thank you in the decremental margin.
Commentary you gave maybe some more color or your thoughts from Threeq to Fourq, you decremental margin in the Americas, specifically, how that might trend in each that quarters.
Duncan Yeah, so what else pretty especially now decrementals abide by segment I think if you think about a logic of this right now it was kind of what's going to drive. It is you know that revenue relative revenue decline I in dollars right. So that's going to be heaviest in brokerage businesses right.
Than the savings that we're getting globally going against that might so we think you ever all trending is gonna be the second and third quarter isn't gonna have a better decrementals in the full because you know just because the full to the heaviest quarter. The amount of dollars that will come down and brokerage is gonna be bigger Anderson.
<unk> dollar terms on that for sure saving money every quarter and that's roughly as sort of similar amount every quarter that you're saving the decrementals will be highest in the and the in the fourth quarter and relatively lower in the second and third quarter, specifically in the Americas, Obviously, we have big but brokerage business in the Americas and you can see the revenue trends there.
You know what your which are driving a lot about global revenue trends were just because in terms of the sort of size of that business.
But we're also obviously aggressive aggressively attacking.
But permanent and temporary cost and EM Americas as well in proportion to that right right because it's the largest business. So I would expect us to be able to sort of six yes. Some of the past.
[noise] up decrementals through the year, but we're not providing specific view on the relative decremental in the Americas versus the global Hall.
Although we obviously saw higher revenue.
You know declines in the second quarter that and we did for example in Europe.
Sure I understood in the back to Slide 10, where you said the vacancy scenario is very helpful. There as well and your commentary about capital markets following very closely with leasing.
I would love your thoughts so on you know if you're trending towards that downside scenario deeper increase in vacancy I mean, it seems to me that potential buyers that you saw the for an ally in it you know vacancy scenario is you know deeper and more negative there might be more lay indecision or capital market.
Right, we think about it.
I think it is I think that you know as Kevin pointed out you.
You know who knows where this thing is going to end up but kevins research is very good and its forecast seem to be very accurate.
And we'll see if it's Kevin esteem are equally is accurate this time around but if they can see if move up into the mid to high teens rents are going to do what Kevin said, they're going to come down depends on asset class been office rents in the U.S. will probably come down you know between as Kevin said, 5% to 15% so that.
Is your bid ask spread.
Got sellers at the moment, who want pre committed pricing you got buyers, who are extrapolating those sorts of forecasts into future and alike.
And that creates a bid ask spread as.
As the trajectory of this recession becomes more clear I.
I think there will be more they consensus view on what.
It is let's use office on what office rents and vacancies are going to do.
Once there is a consensus view on that and there always will be one arrived at some point your bid ask spread Dan collapses and you have trading occur again, there are some owners right now who have capitulated to discounts and we've seen.
Even very very high quality class eight towers.
Ah how the pricing retraded.
But but marginally I did the when I'm thinking specifically was about 5%. This is a very big building.
But I as I said, I think you're thinking about it right and remember that the market will recover before.
Before vacancies trough.
And and I've said before vacancies at their peak and rents trough remarkable recover before that because activity will occur.
As I said once there's some consensus view on where that will end up. So you know how to peak day can see could be two years out to the depth of the rental rate maybe two years out it doesn't mean recoveries two years on back to cover would be well before that or beginning of recovery.
Great. Thank you for the time.
Ladies and gentlemen, this does conclude ladies and gentlemen. This does conclude today's conference call you may now disconnect.
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Mm Hmm.
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HM.
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