Q2 2021 Cushman & Wakefield PLC Earnings Call
[music].
Welcome to Cushman and Wakefield second quarter 2021, net earnings conference call.
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The speakers remarks, and there'll be a question and answer session if.
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And now my pleasure to introduce Len Texter head of Investor Relations and global controller Cushman and Wakefield. Mr. Texter, you may begin the conference.
Thank you and welcome again to Cushman and Wakefield second quarter 2021 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 day, Cushman and Wakefield Dot com.
Please turn to the page labeled forward looking statements.
Today's presentation contains forward looking statements based on our current forecast and estimates of future events. These statements should be considered estimates only and actual results may differ materially.
Well this quarters and year over year comparison is against the trough experienced a year ago.
We are very encouraged to see our transactional brokerage business rebounds, so quickly and the first half of 2021.
Our second quarter brokerage revenue, including our leasing and capital markets businesses was up 89% compared to a year ago and returned to pre COVID-19 levels and 2019.
I'll provide more detail on the drivers of this activity but.
But we believe the faster than expected recovery, we and experience to the first half of the year and capital markets and non office leasing and sustainable.
Additionally, our property management facility management and valuation segments.
Continue to perform well with fee revenue growing 7% and 16% respectively for the quarter.
A recurring revenues have continued to be a source of strength and resiliency throughout the pandemic and both investors and occupiers have continued to turn to us for advice and services.
For example, our assets services business and the Americas performed well throughout the pandemic and.
And it's growing double digits through the first time from 2021 as investors continue to rely on our leadership inside and comprehensive offering her services.
And the second quarter, we reported $220 million of adjusted EBITDA on the already mentioned $1.6 billion and fee revenue.
Both of which are a second quarter record for the firm.
And represents and adjusted EBITDA margin of 13.5%.
This improvement of adjusted EBITDA up 76% and.
And margin expansion of 335 basis points year over year.
Total GDP has now fully recovered and surpassed pre pandemic levels, having grown by a 6.5% annualized rate in the second quarter of this year.
Property recovery has also shown improvement from the pandemic lows and the speed and the recovery varies depending on geography and product type.
As we look across the different property types, we are seeing a broad based recovery with varying degrees and performance.
At the top of the list, we're seeing strong growth continue in industrial and data centers.
Multifamily and life Sciences assets.
And the Americas, specifically, we saw continued growth and industrial leasing and the second quarter.
The sector continues to benefit from the shift to online shopping.
And the first half of 2021 <unk>.
Approximately 204 million square feet of space was absorbed a record high occupancy.
Occupancy and industrial space was roughly 96% and the second quarter of 2021 also a record high.
In addition to these stronger property sectors, we are starting to see some encouraging trends and sectors that have been laggards throughout the recovery.
And retail we are seeing strength, particularly and experiential concepts and.
The economy, reopens and Theres more pent up consumer demand.
As an example.
And the hotel sector STR a subsidiary of Costar.
Proportionate and occupancy has grown from the low 20% range and March of this year.
To 66% in June and with 71% and the week of July 11th 2017.
And the office sector.
Total leasing continues to improve we emphasize that the near term fundamentals remained less clear as businesses continue to make their way back to the office and assess space requirements at.
And at the beginning of the year roughly 17% of U S office employees are back at the office and.
At the end of the second quarter it was closer to 1 third.
The office sector will continue to recalibrate to address the remote working and dynamic.
Most employers are providing time for employees from hair for their summer or fall office returns.
We'll continue to navigate the balance and being in the office and remote working Ulta.
Ultimately come on.
We will need help and developing their workplace and the future and cushman and Wakefield as 1 of the few firms capable of helping clients navigate these solutions.
Within office leasing we have seen some pent up demand coming through in 2021 from delayed decision making.
While we expect this to be a longer road to recovery, we are seeing some very encouraging green shoots immersion and the office sector.
Turning to capital markets as we noted on prior earnings calls.
There was clear momentum and forming and late 2020 and that has continued into the first half of 2021.
According to real capital analytics, and the first half of this year property sales transactions increased 34% compared to a year ago for context that volume is only down 2% versus pre COVID-19 levels and the first half of 2019.
Clearly commercial real estate remains an attractive asset class for investors and demand drivers remain favorable.
Fundraising for commercial real estate investment and dry powder metrics remain at near record levels.
There is no shortage of capital be deployed for the right opportunities and.
In addition to interest rates remaining below historical averages.
Finding yield is becoming more difficult and other asset classes, making spreads and commercial real estate, all the more attractive which will keep capital flowing into our sector.
To be sure the property recovery will continue to be bumpy and uneven.
But as we look ahead, we certainly believe that the positives outweigh the negatives.
As discussed on prior calls we are in our second year of the work we began before the pandemic to.
And to strategically realign the business to enable us to become a leaner.
Faster more efficient organization.
I am pleased to report that these initiatives are on track to deliver and an additional $125 million of.
Of operating efficiency initiatives in 2021.
Which is on top of the $125 million of permanent cost savings, we delivered last year.
Significant liquidity position, which stands at $2.1 billion and.
As a valuable asset both for opportunistic M&A.
And brokerage team hires.
We are well positioned to drive shareholder value in many ways include.
Including our global competitive advantage.
Significant operating leverage and a recovery.
And our strong liquidity position, allowing us to grow inorganically.
While simultaneously deleveraging and through the resulting growth and our adjusted EBITDA.
Overall, we are extremely pleased with the first half of 2020.1.
And with that let me turn the call over to Neil to detail our quarter Neil.
Okay.
Thank you Brett and good afternoon, everyone.
We are pleased with our second quarter performance and encouraged by the very strong start to the first half of 2021.
Fee revenue for the second quarter of $1.6 billion was up 34% and adjusted EBITDA of $220 million was up 76% as compared to 2020.
Our adjusted EBIT margin of 13, 5% expanded by 335 basis points compared to a year ago.
<unk> execution of efficiency initiatives.
<unk> and $30 million of gross permanent savings and disciplined cost management enabled us to capitalize on our operating leverage as brokerage revenue rebounded sharply in Q2 from trough levels experienced a year ago.
Adjusted earnings per share was <unk> 50.
Up 31 over last year.
Taking a look at our fee revenue by service line, our PM FM and valuation and other service lines were up 7% and 16% respectively for the quarter.
As expected these businesses have proven to be incredibly resilient. During this recession and have continued to perform and grow strongly over the past year.
And our facility services business and the Americas continues to experience high single digit growth due to continued demand for deep cleaning services.
Within <unk> facility services represents just under half of the fee revenue and generate solid cash flow on a stable revenue stream.
<unk> services was up 7% and the first and second quarters. This year, reflecting continued demand for COVID-19 related cleaning services principally in the Americas.
For the quarter brokerage revenue increased 89% with leasing and capital markets up 67% at 141% respectively.
We are encouraged to report that brokerage revenue returned to pre COVID-19 levels, when compared to second quarter of 2019.
Our non office leasing sectors continued positive momentum most notably within the industrial sector.
Within office leasing we have seen some pent up demand coming through in 2021 from delayed decision, making and continue to see positive indicators in terms of tour activity and gross leasing.
As we look forward, we will continue to monitor these trends and the sector knowing that the road back here is slightly longer.
And capital markets, there remains a favorable environment for capital investment, which <unk> seen reflected and our results, particularly in the Americas.
Turning to our financial results by segment.
Revenue in the Americas was up 46% driven by leasing and capital markets growth of 78% and 215% respectively.
Adjusted EBIT growth was up over $100 million and the Americas segment, which was principally driven by stronger brokerage activity, coupled with continued execution of cost savings initiatives.
EMEA and APAC were both up double digits, with 13% and 11% revenue growth respectively.
In EMEA and brokerage was up 29% with adjusted EBITDA of $6 million or 10% versus prior year.
In APAC adjusted EBIT was down 8 million year over year, principally driven by the impact of government subsidies reflected and our prior year results.
Our financial position remains strong we ended the quarter with $2.1 billion of liquidity consisting of cash on hand of $1.1 billion and availability on our revolving credit facility of 1 billion.
We had no outstanding borrowings on our revolver.
We continue to be active and exploring infill M&A opportunities to further enhance our portfolio of services globally.
And given our liquidity, we are well positioned should opportunities arise.
As a result of the strong adjusted EBITDA performance through the first half on.
Net leverage stands at 3.4 times on a trailing 12 month basis.
Down from 4.3 times at the end of 2020.
Finally, a few comments on our outlook for the full year.
And we've been very pleased to see the faster than anticipated recovery and the U S economy, and the first half of 2021.
Strong demand for commercial real estate investments combined with high demand for industrial and multifamily space as well as a rapid return to pre COVID-19 volumes and consumer and corporate spending have resulted in strong volumes across most sectors of commercial real estate services.
This rapid return to pre Covid transaction volumes, coupled with our excellent work on our efficiency projects have combined to produce exceptional first half results both in revenue and EBITDA.
As we look to the back half of the year, we do expect the structural dynamics to remain high.
However, we are being cautious and a full year view due to 3 main factors.
First the pandemic continues to be extremely fluid and uncertainty remains high as we've seen some countries experienced ongoing cycles of lockdowns and delayed reopening.
Second we believe some of the activity we have seen year to date was attributable to pent up demand as occupied and owners acted on previously delayed decisions the.
The property and recovery and near term fundamentals across sectors remains uneven as we continue to observe and mix of strong program performance and certain sectors weak performance and others and varying degrees and between.
Lastly, while we expect the strong capital market performance to continue we do have tougher comparisons and capital markets and the fourth quarter. This year, given our relatively stronger performance last year as activity began to pick up.
Taking all this together it is clear that our 2021 full year performance is anticipated to exceed our expectations from earlier this year.
We currently expect total consolidated revenue to grow and the 12% to 16% range year over year.
As executive Chairman and will continue to participate and our quarterly earnings calls I'll continue to lead strategy M&A and succession planning alongside John.
John has been the greatest of partners and an exceptional leader for us for many years even.
He's a much admired and respected leader both inside our firm and across the industry.
And as high level of integrity exceptional work ethic deep client knowledge and many many global relationships.
And the obvious choice.
As our next CEO.
And so very grateful for the partnership I've had with my Cushman and Wakefield colleagues and with many of you listening to this call.
I look forward to our continued to work together, our continued growth and transformation of Cushman and Wakefield as a distinguished firm with the greatest integrity and the brightest and most innovative people serving the world's most interesting and prestigious clients.
Join me and congratulating John on this well deserved promotion.
And with that I'll turn the call back to the operator for Q&A operator.
We will now begin the question and answer questions.
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Keep that quoting and ordering a cliff.
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Quarter to join the queue.
Okay.
The first question comes from Anthony <unk> from Jpmorgan. Please go ahead.
Thank you and congratulations to John.
My first question is looking.
And looking at your guidance for revenue and EBITDA and the comments around kind of where that stands relative to 2019, if I just take the midpoint of your revenue.
Puts you just a few percentage points below 2019 levels and similarly.
And similarly, a little bit below 2019, and EBITDA. It seems like since then you've done the $250 million and cost saves. So just wondering if you could help with a little bit of a bridge in terms of what some of the offsets may have been.
Sure Neal.
Yes, sure, yes happy to help you there.
As we look we've as you say we've been incredibly pleased with the cost savings, we've been able to take out of $125 million this year and hazard and $25 million last year. So that really does help us. We've also seen some nice strong flow through from brokerage. So that also has helped margins as we look out a couple of factors.
Basically playing against that number 1 we've got the increase and all.
Short term incentive programs on bonus programs.
Those will be up this year as a result, and the strong performance so that creates some headwind.
And also.
In terms of the capital markets have some higher comps in the back half of the year and.
And so that will play into the back half so as we look at the full year.
We will see a more evenness between the EBITDA and the first half and the second half.
For the year.
We do see margin stepping up as we look out we are not providing any guidance at this point to any sort of indication on what 22 looks like but certainly the permanent costs do help us.
Offsetting those permanent cost out you do also have natural increases in the business, so that offsets that slightly but.
But we do expect margin to increase.
Certainly as we look out over the next few years as a result of those permanent cost savings.
Okay, and then just 2 other items just maybe for free.
Brett.
And then your office business has been muted.
But if there is a backlog building of leasing is there any way to frame kind of what that could mean, if and when that starts to clear.
Sure Toni I think let me, let me characterize it this way and again Theres a lot of unknown. So.
I can frame I can frame and the best I can but we're we're looking at a very fluid situation, but here's what we know for sure. We know that the office lease from recovery is going to be more it's going to be quicker and what we thought it would have been even 6 months ago debt that is now clear to us and that's really a result of the fact, a very strong GDP coming through.
The stimulus and the economies and the job growth that we are beginning to see and we'll continue to see going forward. We believe that full recovery and the office markets is and the relative near term its not out 3 years from now it's not out 4 years from now it's something.
Much quicker than that and we know that based on the activity, we're seeing and the markets today and you heard us talk about touring activity, which is a terrific leading indicator for leasing revenues is up 80%. So people are active and the marketplace.
Looking at space and and do what they do now office leasing revenues.
Don't happen overnight, you all know that and so a tour that's happening today may turn into revenues.
And of this year early next year, but we're now much more confident that as Neal referenced that snow on the mountain, which is office leasing which is our 1 of our richest business lines and 1 of the biggest producers of profit for the firm, which has not been realized yet and notwithstanding this great performance is there for us.
And so the question is and what you're really asking is when does that snow melt and when does that flow through the P&L again, I would say likely sooner than we thought.
6 months ago.
And I would expect to see office leasing and begin to pick up back half of this year and.
And next year and I do think that.
It's a big business line and so as it does pick up and as it does.
Begin coming through it should come through it rich margin.
Great. Thanks for all the color.
The next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Good evening, Thanks for taking the question I just wanted to go back to the EBITDA.
Kind of cadence or trajectory from and the second half I know this and sort of and unusual linearity and a rapid snapback and Duke you, but typically you see you know correct me, if I'm wrong, what 40, and 50% of the prospects being made and mostly the fourth quarter. Some on the books and so I'm wondering as you know and it's not <unk>.
Typical that you see.
Higher bonuses et cetera, also and the period historically and so I'm just wondering how much of this is conservatism how much of it is.
Our view that I know, you mentioned and tougher comps on how.
How much of it and debt.
On the pandemic may flow leasing or capital market and.
And then can you just clarify it and you said into 'twenty 2 with you a view on.
On normalized proportion of EBITDA and 22.
Yeah, Let me Neil let me hit it first and then ill and adhere to give the detail true I think look I think what youre dealing with.
For this and in context, which is.
Just 4 months ago.
This industry was looking at 2021 and 2022 very very differently than we are today and you've heard that now on every earnings call and the industry. We all know on.
I think being very clear that this recovery.
It's happening much more quickly and much stronger than we expected, which means that the recovery of all of our P&L. So it's going to happen much more quickly than we thought so that that's the good news and that's obvious and it's clear and we all see that we've just been through a really interesting 15 months and I think for all.
All of us it tempers, our forecast and it tempers our outlook as Neil said.
On our outlook is tempered by 3 unknown now if those are unknown and stone and her if I did.
Delta variant goes away if.
And the pent up demand and the numbers is less and we thought and more of this is structural.
And we're going to do better but we've.
I think tried to balance the fact that we really really like what we're seeing things feel really good right now, but we've been through a period of unexpected surprises, which I think for all of us and the industry is temporary and.
And the way, we are talking about and forecasting.
The coming quarters, and and a couple of years Neel do you want to want you jump into that and do a better job on it.
Yeah.
Brian I think you did a great job Vikram I think you also outlined it very well we've been very pleased with what we've seen and the first half as Brett said there the recovery has been much faster than we thought.
We are just being cautious as they look to the back half.
As we said Covid is still very fluid.
And that's something to consider.
And if it does not affect if we see the continued recovery at the pace at which we've seen it.
Then I think we are very optimistic about the back half of the year.
Only sort of.
Numerical thing to consider is that we did begin seeing the capital market's recovery in the fourth quarter of last year. So as we come through the year. We will have we will have we'll be up against that as we have to hit the fourth quarter other than that.
I think we're just being.
Cautious because of the uncertainty, but feel very good about the business and at this point.
Don't see any they know.
And expected structural changes to what we're seeing and this recovery.
I just maybe wanted you to clarify that are big for us because.
I was on the impression on.
<unk>, that's the easy comp like you are still seeing declining cyclical businesses.
Total revenue overall.
Transaction volume globally was still weak as well as moving forward.
What is it 1 specific business line and Youre, saying makes it a tough comp.
Well, if you think about it and capital markets last year second quarter was down 50% third quarter was down 35%.
So fourth quarter, yes was down but it wasn't down anywhere near what we saw in the second or third quarter last year.
Well, yes.
It was down.
It wasn't.
And don't have anything near the comp that we've had in the first half of this year. So that really is what I'm pointing to when I talk about the fourth quarter.
Oh boy and go to their relative to the trajectory I I get it.
And then.
Sure.
And I should congratulate all congratulate John and congratulate.
Congrats on it John but I guess, Brett I wanted to.
You mentioned you'd be involved and broad strategy and you talked about continuing to spend and white space.
Can you just walk us through as you look kind of 12.18 months out what are the areas that you're really focused on spending white space.
Sure I'd be happy to and so we're as you know and all the colors and we're very active on.
And the infill M&A World, we've talked about first in terms of verticals. We've talked about 4 verticals that we are keenly interested right now industrial logistics health care data centers and life Sciences, and so looking at businesses that service those verticals people that transact and those verticals are a high priority for us and.
We have.
A number of specific global initiatives in place.
And then all of our regional Chief executives are ventured and together.
On to invest and specifically.
Those verticals and people that service those verticals. In addition, we continue to look at.
The on boarding of key brokerage talent.
And across the major markets and I would say this is primarily focused in the larger markets and the U S EMEA and Asia Pacific.
And we don't put PR releases out and all the teams we're hiring but I can tell you that.
And for instance, and the last year and a half we built from a standing start I think the leading now capital markets team and Australia, New Zealand and they are working on from a largest deals and have closed on the largest deals and those and those marketplaces over the last year and we are also very interested in.
Verticals around project management project development.
And other recurring revenue.
Verticals across across the company. So really active in that space were also I would say quite interested quite active.
And looking at how we maybe not through acquisition, but how we partner or perhaps joint venture with.
Leading technology firms as it pertains to servicing our largest enterprise clients and this is around workplace AI workplace management.
We spent a lot of time on this area.
And I think youll find it and we'll talk on this in later quarters.
Some of the investments, we're making and that area.
The work, we're doing there is actually quite exciting and should be quite meaningful to our Uh huh.
Our ability to capture share going forward, so and awful lot going on and area.
And the last thing I'd mentioned is we've.
Broken before around our desire to be a major player, particularly in the U S and.
Commercial mortgage debt advisory.
We've got a lot going on there and we're.
Spending a lot of time looking at how we.
On best enter that business and I think that's so if you can look forward to and the future as well.
That's great I just wanted to quickly get your thoughts on 1 more just last question.
And B M and F and F N P and we talked a lot about.
The office side in terms of outsourcing.
Just wondering on the industrial side.
If you have more and more automation and logistics changing the boxes, it says and bring them closer and closer to community.
Is there an opportunity for cushman and the <unk> business, specifically and industrial.
Great question and it doesn't it's a nice softball, and thank you for that and I'll explain why.
Interest.
Interestingly and the combination of the 3 firms DTC, Cassie trailing and Cushman and Wakefield the cafe truly property management business was heavily heavily weighted to logistics and <unk>.
<unk> 5 years ago, 6 years ago, and we were putting these businesses together.
And that was good it was it was interesting but.
We really saw it building the office side out as a really key priority as you guys have gone by we've continued to be a leader if not the leader and industrial property management. We also by the way do a huge amount of facility services and industrial so it is a big vertical for us and.
And something that we're already very active and and learning and lots of share in that space. It's something we've been very very good at for a long time and and this is the case I think of the market coming to us.
And we're glad to debt.
Great. Thanks, so much and congrats on your on.
You're on and John as well.
Thanks.
The next question comes from Doug Harter from Credit Suisse. Please go ahead.
Oh, Thanks, and you talk about the.
And the level of activity for per her new proposals true to win clients on the property management side and then how about the.
On progressing over the past couple of quarters.
Sure so as.
As always happens in a recession, so I'm going to take you back a year then I'll answer the question about today what happens during a recession is those really slow down because clients tend not to switch.
Anders when things are are scary in the marketplace and we saw that.
Both good news than bad news, we saw last year very little.
Switching and the <unk> space.
And as things begin to improve the opportunity to pitch and win new business.
And is picking up and I would say that of all of our business lines right now.
On property management.
Is 1 of the stellar performers for us and accretive share and and particularly right now and the U S.
Our property management business is doing better today than it's ever done.
And there's a lot of activity and that world and there is a real not surprisingly, there's a real continued consolidation and the property management world, which by the way historically, it's been a bit more fractured bit more fragmented.
And then say the outsource leasing world our FM World property management is.
It is kind of at that stage now, where we're really getting into serious consolidation down to a small number of very very large vendors and which were of which we're 1 so the activity is good and.
Property management and the other thing I would say is that many times property management contracts don't change unless the assets cells and as we're now seeing more assets selling we are beginning to see more asset contracts move now that of course it plays right into the hands of big firms like Cushman and Wakefield, because our capital markets brokers.
And are doing those deals and there is a real.
Synergy there opportunity there to pitch those clients and their due diligence phase new property management contracts, which were very good at so yes property management and lot of activity in that space really happy about what we're seeing and for us on a real standout.
Great. Thank you.
You bet.
Once again, if you have a question. Please press Star then 1.
The next question comes from and then Kurt.
Rajeev <unk> from Wolfe Research. Please go ahead.
Hey, Thanks for taking my question and by the way and thanks for putting out and EBITDA guidance a day the industry would do a lot better.
They put out numbers like you did so thank you.
I did want to ask though.
If you look at the numbers.
And you can see where expectations are for the second half of the year I'll give you I'll give you a bare case that I think I and and other analysts my face and the next 24 hours. If you do the bottom of your EBITDA range.
It's actually <unk>.
50, 51st half versus second half and if my math is right. It actually implies no EBITDA growth after the second half of last year.
So maybe if I could ask what kind of conditions would have to exist for you to end up at the bottom end of your range.
Sure Neal.
Yes, great question, and that's why I would encourage you to.
And the tone of our guidance is as positive and optimistic we have been cautious because of what.
What we seeing and the market if COVID-19 weighted flareup if offices were to close again, if we were to move back into Lockdowns.
We sort of.
That's when you start seeing numbers at the low end of the range.
And so on and Thats really helpful. Thank you and yeah, sorry go ahead yeah.
Okay. Thank you. Please go ahead.
Yes.
That's right.
And so those numbers at the bottom you did another locked down and that's what I wanted to check but anyway. Please go ahead exactly.
We do still expect the back half.
EBIT to be greater than the first half you mentioned it would be 50.50, we still expect the back half to be higher and.
And but just not at the same levels that we saw in 2019.
Sure.
And consistent with other commentary and then I had I had 1 more your GAAP earnings were pretty good for the quarter the acquisition related cost and efficiency initiatives came way down on a year over year basis is that any way of forward indicators that that adjustment may be reduced going forward.
Yes, some of our GAAP adjustments related to our merger, which happened 3 years ago, and so youre going to see that roll off over time. We also did do a lot of integration work.
2 years ago, bringing 3 companies together and.
And those costs also will no longer continue so you will see those adjustments.
Drop over time.
Got it. So this is an anomaly this is youre going to see it.
A GAAP and an adjusted become closer and closer to each other.
That's correct yes.
Great. Thanks for your help.
This concludes our question and answer session I would like to turn the conference back over to Brett White for any closing remarks.
Terrific well thanks, everybody, we're really excited about the trajectory of the year excited about what the year is going to bring and look forward to talking to you at the end of the third quarter with further updates.
This concludes today's conference call.
You may disconnect your lines.
Thank you for participating and have a pleasant day.
And.
[music].
Yeah.