Q3 2020 Cushman & Wakefield PLC Earnings Call

Driving growth by leveraging our leading full service platform.

Both our revenue and EBITDA performance exceeded our expectations.

Since the beginning of this pandemic cushman and Wakefield has been at the very forefront of thought leadership in our industry.

In early April we launched our six feet office prototype in our recovery Readinessguide to demonstrate how buildings cause you up be operated safely.

Including many of the building hygiene protocols now considered commonplace.

Revenues were down 15% compared to last year.

As expected P. M F M revenues.

Which represent more than half of our overall mix annually.

Were stable and in fact increased by 3% over last year.

As you know these are contractual fee based assignments.

Tied to essential functions for operating commercial real estate assets.

In 19 comparisons.

Well the overlying trend across the second half of 2020 is expected to be better.

Now what we expected at the onset of the pandemic.

2021, right now we're in a very uncertain environment for targeting plans to increase revenue in EBITDA year over year.

Expect our strong focus on cost reduction to continue.

We have identified concrete plans for further permanent cost productions to add to those we executed before cove it.

$400 million in annualized savings by the end of Twentytwenty, starting in Q2, which is to say $300 million achieved during the year Twentytwenty itself.

Overall through the third quarter, we have achieved over 200 million in savings this year.

These actions include the permanent cost savings announced in March which total around $150 million in full run rate benefits. These are substantially complete.

Cause it was down 15% as compared to last year.

The stability in our PM F. M service lines continue to develop to help offset the impact of declines brokerage evaluation another service lines.

On balance fee revenue trends for the third quarter with somewhat improved over what we saw in the second quarter.

P. M F M grew in the quarter and brokerage declines were less pronounced than we saw in the trough in may and June.

A brokerage service line revenues were up roughly 30% sequentially from the second to third quarter.

Its impact was partially mitigated by the permanent and temporary cost actions in this region.

Merrily due to a slowdown in activity in Hong Kong, which is largely unrelated to co that.

As the economy continues to heal although we expect the first quarter to show a decline year over year, given the impact of the Covid pandemic began in March.

You still expect her P. M S N a service line to be stable or growing in 2020.

And we expect this to continue into 2021 is.

As a reminder, these businesses represent more than half of our total revenue this year.

We expect that there will be a net increase in operating expense driven by the return to a more normal bonus payout for non fee earners.

There remains a lot of uncertainty and the speed of recovery in the broader economy and our brokerage markets as we develop our detailed budgets. We're currently assuming some brokerage growth.

In 2021 as a whole but.

But not back to 2019 levels.

In addition, we extent expect stable or growing PFM revenues with these assumptions, we are targeting to grow revenue and EBITDA in Twentytwenty one.

We will we will provide more detail on our fourth quarter earnings call in February.

As Bret said you can be confident.

That was out of the cobot pandemic outcome and economic impact we will continue to focus on the welfare of our employees supporting our clients the financial strength of our company and our profitability in Twentytwenty Twentytwenty, one and for the long term.

With that I will turn the call back to the operator for the Q and a portion of today's call.

And at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment it may be necessary.

Stage flight stops it gets taken off the table and companies kicked that can as far as I can kick it.

Because I think of the unique nature of this downturn, which is the uncertainty around coven and future Lockdowns and other reasons, what we're seeing is a pretty significant level of course.

Corporations renewing and renewing for short term, we talked about this last quarter that would be a logical.

Action for companies to take and we are indeed, we are indeed seeing that so at the moment I. The way I would describe what were seeing on the leasing side is.

Rents are holding up on that will change we know that rents are going to be coming down vacancy is beginning to rising rates begin to rise fairly quickly now which is again exactly what you would expect.

In a downturn of this sort of companies that have not do not have the ability anymore to kick the can down the road or many of them about a third of them are based on our numbers are renewing and that's that's a higher percentage than is typical they're not going to market. There is going to renew and there were no.

Irene for short term and renewing that they were doing it shorter term leases and a bit higher percentage than you would see in a normal marketplace. Again. This is almost playbook for what you would expect I think again I think what was perhaps a different here is that the uncertainty around cobot and the uncertainty around.

What it might bring on in future walk down probably exacerbates the dynamics, a little bit but at the margin. So I would say, it's playing out pretty much the way we'd expect yeah, we're going to go to harder times before things get better but as we as you saw in our published a forecast it kept door put out and we do see the markets return.

I need in any environment, but Duncan if you'd like to put a little more precision around that you should feel free.

No I think I pretty much agree with you, but I will not sort of specifically sort of saying a particular kind of defensive liquidity level, we want to keep I think.

You say we.

We have a completely undrawn revolver in a very large amount of cash in in January the peak to trough cash.

Cash cycle, which is roughly speaking from the middle of the year to the end of the year with the middle of the year being the trough I mean, we we obviously have some capacity for that but but but is Brett said, that's that's relatively small in comparison to the amount of liquidity rehab. So you should think of us as having you know more than adequate capacity to do quite a lot.

Been fill if the right kind of deal to come along and that so that's kind of what we're targeting through the pipeline that we're we're developing right now.

Great. Thank you.

And our next question is from my whole funk with Mango America. Please proceed with your question.

Yeah. Thank you for that question guys I hope, you're all well in a couple of like you know so first on the on the on a broker decide and number your peers are highlighted strength in our industrial multifamily, obviously want a capital chasing deals here.

What what is your sense of transaction activity. It came back up in in the office and retail Nicorette question.

Yeah. So first of all yeah, let me throw a compliment too.

Or two other welcome bolts bracket peers I think I think what everyone saw from the industry this quarter and I've seen this year. The three firms all three of these firms uhm ourselves and the two others I've done a very very good job at uhm nan-ching costs and I'm showing that they are very resilient business.

For them to the downturn like this cause it gets too fancy.

Transactions and transaction volumes and so forth certainly what you've heard from those two here, we would mimic which is industrial you know, it's a sweet spot for everybody. It's highly prized transactions are occurring and that's gray multifamily really.

Really good right now and by the way across the board I've I've seen we've seen real institutional.

Interesting continuing to multifamily is rent delinquencies seemed to be quite well and and and and more regional and I hadn't called more boutique players such as a I speaking to a an owner about multifamily that's what development business here in California, who works in secondary market their business could be better they have no rental I can see to speak up.

So multifamily as he referenced really and Ah Ah sweet spot retail retail yeah, I I think a retail as an opportunistic investment and so that's the kind of money that is generally will generally look at retail right now what that means is that you know they're gonna look for.

Extraordinary yields and to get interested in a property and because of that you seem very slow work around recently seen a couple trades recently read something nothing to you know not even barnburner name than an office you know a core well least hi credit office tower.

A major C V D is still highly attractive to capital Yeah. Those you know there's cap rate, while they've moved a bit you haven't moved a white amount suburban interestingly suburban high quality office calories haven't moved much not much at all.

<unk>, which I think is indicative of the fact that investors are looking at longer term trends around suburban office, they like what they see but.

You know the influence of your question is correct. Most of the action is looking at I would print kind of disorder core high quality high credit great buildings in office buildings and C DS.

One of those comes to market is going to trade industrial participant, particularly large newer industrial logistics or industrial entitled land or older industrial buildings that can be converted to high quality logistics those are in great great demand retail [laughter].

Retail is is hurting and we all know that and multifamily in in great demand hard to get at the moment are hard to get it because it's well price and it's not moving down.

And then of course, sorry, if I could I know you mentioned converting a temporary cost savings to permanent cost savings can you hired a few areas where you're converting that.

Leasing here it just seems to be hot topic, and I'm going to ask the question a bit of a different way but.

But just given the the continuation here of occupiers are weighing longer term decisions on leasing side curious if you can comment on how long that practice can continue until.

Until landlords are owners.

Start to require more permanent decision and I guess is there any reason to believe that this period of kind of short term renewals that were phasing through here could lead to a.

I don't know a paradigm shift or a longer term shift in the way your mindset occupiers, we space.

It's a great question.

So first how long can or how long will owner.

Except short term renewals.

The you look very hard to say I think it will be based entirely on the markets view of the future and at the moment because that's uncertain I.

I think many owners would prefer to keep that tenet in play.

In their building then to lose the tenant and look for a new one as soon as the market feels that.

World Today, we would you know we would certainly be in a camp out if you can get your landlord to sit tight for six months or years, that's not a bad place to be because if you think that's going to come down a bit and then when they do.

And take advantage of that and trying to lock in term and I think that's likely to wait. This fall. This will play out yeah. We mentioned that we think that the inflection point in the markets is.

Second half of 22, however on the turn in the market in other words, the yeah I think the time, you'll start seeing a real important numbers coming in yen activity start to improve we'll do well before that.

It just takes time for the vacancy in the rent right numbers to settle out and then turn but I do think that you're going to see I hope you're going to see that by this time next year, certainly tenants feel much better about the future I'm more certain about what they want to do with space and much more likely therefore to agree to a longer term.

[noise] [noise]. Thank you that's it that's really helpful. One more from me then just on the Pms I'm business are you guys experiencing in the near term implementation or RFP delays that could work to accelerate growth in that business.

Once you clear seem in person restrictions and also if you could just comment on how the pipeline in that business looks relative to maybe the end of the second quarter.

It for me thank you.

Sure so the parent, especially the pms in business.

Has been chugging along nicely since March certainly dealing with lots of issues like all clients are which is how to get people in the buildings and having worked safely and.

So on and so forth, but as it pertains to.

Bids we've definitely seen a number of large RFP is both in property management and facility management in the marketplace throughout the year and there were there was a definitely slow down in March but things picked up pretty quickly.

Then, we as well as our competitors because a wrong, but in the same projects.

Or clients or I would say would we would all describe the pipeline as as fairly robust b.

The I think what.

The dynamic that does move a bad in times like these is in the early days of a steep downturn you do find that particularly in property management the number of.

In and out buildings goes down because the sale of buildings goes down so in the profit imagine business. If you were to talk to Marlin Maloney, who runs our U.S. I taught me to answer that and she would tell you that the churn in the portfolio is less than.

Than usual in the region that is less office buildings are selling that's also true for industrial and retail and.

And multi family as that trading picks up again, you'll see more transition that that's good and bad for everybody equally we will bid the ones that moved or hopefully you take the buyer to the properties or they're being sold at the property management. There we will lose some that go to buyers that use somebody else, but I wouldn't.

The way the pipeline looks and the way the market dynamics are at the moment I wouldn't look for.

A large pent up demand wave in P M or FM, because really the folks that are running those companies spend of bids out have been hard at work all through the pandemic working on their RFP isn't those aren't fees are coming into the market and.

By the way I would point to the numbers Youve seen which is for generally again for this that the top tier for him to talk victory firms here in our industry.

Solid numbers in those business lines.

For the year and solid numbers for the last two quarters again indicative of a share gains and growth.

In that in those particular business lines, which is exactly what we expect to see occur in a downturn I would say if anything and then my final comment on this.

If the downturn where protracted.

If we all have this wrong if for some reason things would get materially worse in 21 than they are now, which we don't expect to be the case at all I think you'd see the pace.

Uh huh.

RFP is going to market pick up materially. Because then are you know these large corporate clients. Since two owners are going to feel a bit more stressed on their own panels are more likely to outsource things. They didnt plan to outsource, but you know I again just to answer your question I don't see a big wave of pent up our piece come to market you know.

Eight months from now because they aren't coming to market now.

[noise] [noise] operator, any more questions are we done.

And we actually have one more question just energy mind, if we have any questions. You May press star one on telephone keypad. Our next question is from Patrick O'shaughnessy with Raymond James. Please proceed with your question.

Hey, good evening, how are you thinking about the relative and <unk> <unk> before Gregory and lease cap markets.

I'm afraid your question cut out would you repeat that please.

How are you thinking about a relative timeline towards a full recovery between leasing the capital markets because she had a rebound before capital markets is it or the independent of each other how are you thinking about that.

I think well, it's a great question.

Full recovery, so measure definitely writes a full recovery and leasing to us would be.

Back to pre coded vacancy and rental levels.

That's how we would I think define recovery.

Yeah as we've spoken about in our research materials, we think that happens.

You know after the mid 2022.

Later than that.

23.

And that's that that takes us to a place that was.

You know lets call fourth quarter 2019.

By the way and I'll get to capital markets in a moment one of the dynamics at play here, which I know you're aware of is as again truth for our or bigger appears here.

Weve revised our cost structures in a way that.

For us for our performance.

Production performance returned to pre topic levels, we don't need any we don't need near that recovery.

We take as much cost out of our systems here as Duncan has has referenced.

But I think Lee, saying you know what we've seen is there's an aircraft or it's a slowness. It's a slow move down which is why rents are at the moment I think hanging in there basically where they were six months ago and they will come down a couple of markets tends to Mark you know daily and capital markets, certainly and you've seen in that number.

I think I'm from U.S. was down 57%.

We were down a bit more than half and half of that so much much better capital markets volumes should pick up and I think the way you would think about recovery in capital markets that should kind of ahead of the recovery in leasing again, because the capital markets business can move so quickly.

Okay dark corner from the year ago period can you discuss your 1.9 billion and liquidity in context of your balance sheet leverage and the associated debt covenants.

Yeah, So I'm gonna, let that get hit it I'll just remind you that that are only covenant springing cut it on the revolver.

And then then the covenant comes into play, which we don't see any possible sooner it without ever does come into play but that can do you want to answer the questions specifically.

Yeah. So we as breakfast reference, we don't have a covenant and in and in practice right now so unless we draw the resolve of like more than $408 million or something at a period end. So impracticality, it's not a constraint because we have $900 million cash right. So you know I I don't think really the net leverage ray.

<unk> over the next few quarters and this sort of trough period is it particular constraint on M&A because it doesn't really apply to any covenant. So.

You know I I think when we think about that leverage that's gonna be something which we have thought about we were two 2.5 times in the last year and obviously when we come back out of this covid downtown will will will think about that instead of in a sort of more normalised context again, but right now it's it's it's not a particularly constrained because as I said, it's not it's not a covenant measure because we don't have a covenant right now.

Alright, great. Thank you.

And we have <unk> and a question and answer session and I'll now turn the call over to Greg One quick closing remarks.

Perfect well again I appreciate everyone's time on the call. This evening and I look forward to talking to you again and pretty much.

Uh-huh.

And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.