Q3 2021 Cushman & Wakefield PLC Earnings Call
Based on current forecasts and estimates of future events.
These statements should be considered estimates only an actual results may differ material.
During today's call, we refer to non-GAAP financial measures as outlined by the SEC guidelines reconciliations of gap to non-GAAP financial measures definition of non-GAAP financial measures. Another related information are found within the financial tables earnings release, an appendix of today's presentation.
Also please note that throughout the presentation comparison in growth rates are comparable periods of 2020 and our local currency.
For those of you following along with our presentation will begin on slide four and with that I'd like to turn the call over to our executive chairman and CEO brick white bread.
Thank you and thank you to everyone joining us today.
Before we speak to the quarter, we have invited John Forster, our current president and incoming CEO as of January 1st to join US on the call today to provide some comments on our operations in performance for the quarter.
Following Jon's comments, Neil will provide additional detail on our financial results for the quarter.
I would like to once again, thank are incredibly talented team of cushman and Wakefield professionals around the globe.
We are proud of the hard work you perform every day to help our clients.
We are thrilled to see those efforts come through and another quarter of very strong results.
First have momentum continued in the third quarter with consolidated fee revenue of $1.7 billion, improving 27% compared to prior year.
Third quarter brokerage revenue, including our leasing and capital markets businesses was up 64% compared to a year ago and up 10% versus 2019 pre COVID-19 levels.
We continue to observe a sustainable recovery and capital markets and non office leasing.
As expected, obviously think continues to lag other sectors, but we are continuing to seeing green shoots emerge each quarter, which I will touch on shortly.
Additionally, a recurring revenue streams and RPM FM service lines continue to perform well with free revenue growth of 5% for the quarter and valuation and other growth of 11% year over year.
In the third quarter, we reported $219 million of adjusted EBITDA, which represents an adjusted EBITDA margin of 12.9%.
This improvement of adjusted EBITDA of 85% margin.
Margin expansion of 405 basis points a year over year.
Two amenities to workplace design.
And secondly, they've been a pioneer in using technology to efficiently manage that experience.
And the office space around it.
Krishna Wakefield has a deep history of operating buildings for the world's largest landlords and owners.
And in solutions and executing large scaled facilities management outsourcing strategies on behalf of Fortune 500 occupiers.
Through this partnership we will help scale, we works tenant experience platform from beyond just their branded centers into the rest of the office market starting with our clients.
Well, it's only been a few weeks since announcing this partnership we've already had a strong positive reaction from our clients as managing employees in office experience is a top priority right now.
John will share more details on how we expect this new offering will help differentiate cushman and Wakefield with both investor and occupier clients.
We are confident partnering with industry, leading firms like greystone and we work.
We will continue to strengthen and differentiate cushman and Wakefield and it's one of the Premier commercial real estate platforms for both occupiers and.
Investors.
Before providing some market commentary I'd like to make a few comments about the pandemic.
The situation remains fluid and although the world is making progress towards heard resiliency.
The pandemic continues to disrupt economic activity in certain parts of the world.
Despite the ongoing challenges presented by the pandemic the commercial real.
Real estate sector has proven extremely resilient.
Every obstacle thrown its way.
As evidenced by the strong performing property sectors.
The trends we experienced in the first half have continued their momentum into the third quarter with substantial growth in industrial data centers multifamily and life Sciences assets.
In the third quarter, the U S industrial sector absorbed 141 million square feet of space and all time record high.
Year to date, the sector has absorbed 366 million square feet of space, which is already higher than the previous peak in.
In 2018.
The U S capital market sector is also booming.
According to real capital analytics third quarter property sales transactions registered at $193 billion, which is an all time high.
Year to date.
LS volumes totaled $462 billion, which again is a record setting pace.
This surge in activity is being driven by different property types relative to past boom cycles. However.
It is notable that investors are beginning to warm up to the office sector recovery as well.
In the third quarter office sale volume increased by nearly 140% relative to a year ago and office cap rates tightened by 30 basis points.
In terms of office leasing as we have said before this sector faces a prolonged recovery relative to other asset classes.
Moreover, Delta clearly pushed back some of the return to the office for some employees.
That being said green shoots continue to emerge each quarter supporting our thesis that the office sector will fully recover from this event.
Gross leasing activity is picking up in virtually every market we track.
Tour activity remains extremely robust.
And as I've said on past calls.
That is a great leading indicator for future leasing.
<unk> Directors Angeles Sun.
Angela is an accomplished executive who will add a unique perspective to our board given her diverse range of experiences across numerous sectors, including data and technology financial services.
Government and health care.
We are thrilled to have her on the board.
With that I'd like to go ahead and hand, the call over to John.
Thank you Brett I'm thrilled to be on the call today is our leadership transition approach is at the beginning of 2022.
I'm pleased to report that the execution of our strategic realignment and multiyear transformation to become a leaner more efficient and agile organization is well on track.
The actions taken across the entire platform has been material and impactful, allowing us to better serve our clients drive significant operating leverage and enhance our ability to generate cash to reinvest back into the business.
We're on track to achieve $125 million of permanent savings this year.
And 250 million permanent savings in total over the past two years.
This focus on operational excellence and continued tight management of costs.
Cushman and Wakefield to perform asset services on a portion of their portfolio along with a mix of third party flat space operators, many of whom knew struggled through the pandemic.
Today. This client is planning the consolidation of the service providers through the proposition of one seamless asset services and flex space solution.
This of course is a highly replicable and scalable model.
Turning to the occupier opportunity.
At the very top of every corporate priority list today is managing the employee experience as well because returned to the office.
While it's cushman and Wakefield has been a leader in serving the technology sector for many years we.
We are now seeing increased interest from other industries, such as manufacturing and financial services as a result of Ah We went partnership.
Particularly where facilities management as soon as a critical link and the employee experienced relationship.
Finally.
G as fast, becoming a fundamental consideration and every real estate decision.
Preliminary analysis highlights the growing focus on E. S G and invested choice as demonstrated by a 17% increase in ESG commitments from closed private capital funds in 2020.
DSG assets now performing 19.3% higher in terms of average market sale price compared to the non ESG buildings and those more environmentally sound assets now consistently achieving higher rents when compared to the non ESG counterparts.
Cushman and Wakefield intends to lead our industry in this area as demonstrated by our science based targets a net zero commitments announced in September.
We're taking bold actions that will materially reduce our own environmental impact and also that of our clients.
Or three sustainability targets include reducing absolute greenhouse emissions by 50% by 2030.
Engaging with our clients to set science based targets by 2025 and.
The cheating net zero across our entire value chain by 2050.
Continued since the end of 2020, particularly in the Americas.
Brokerage revenue exceeded pre COVID-19 levels by 10% when compared to third quarter of 2019.
Our non office leasing sectors continues to demonstrate resiliency amidst disruptions from delta most notably within the industrial sector, where we are seeing record levels of absorption.
In office leasing the trends of our recovery remain constant with mid to end of 2022 recovery and as we have indicated for several quarters. Now we are confident in that recovery given the following observations increases in gross leasing activity.
Bus tour activity and execution of longer term leases that are consistent with pre pandemic nodes.
PM FM and valuation and other service lines were up 5% and 11% respectively for the quarter. These.
These businesses have proven to be incredibly resilient during the downturn and have continued to perform well and grow strongly over the past year.
Within <unk> facility services represents just under half of our fee revenue and generate solid cash flow on a stable revenue stream facility services is up mid single digits in the third quarter.
<unk> continued to manage the COVID-19 related cleaning services principally in the Americas.
Turning to our financial results by segment revenue in the Americas was up 33% driven by leasing and capital markets growth of 45% and 116% respectively.
Equates to 12% growth in brokerage versus 2019 pre COVID-19 levels.
Adjusted EBITDA of $161 million was up almost $80 million in the Americas segment.
Which was principally driven by stronger brokerage activity, coupled with continued execution of cost savings initiatives.
EMEA and APAC, both grew revenues, 13% versus prior year, driven by brokerage up 39% and 60% respectively.
In EMEA adjusted EBITDA of $29 million was up $17 million versus prior year, while APAC adjusted EBIT of $30 million was up $6 million.
Our financial position remains strong.
Ended the third quarter with $2 2 billion of liquidity consisting of cash on hand of $1 2 billion in availability on our revolving credit facility of $1 billion.
We had no outstanding borrowings on our revolver.
Net leverage was two eight times on a trailing 12 month basis at the end of the third quarter down from the four three times, we reported at the end of 2020 and down from three four times reported at the end of the second quarter.
We are well positioned to continue to fund operations and invest in future accretive infill M&A and broker onboarding opportunities.
As you've heard we've announced a strategic joint venture with Greystone, which will combine two industry leaders with capital markets and lending capabilities in the multifamily space.
The company will contribute $500 million for a 40% stake in the joint venture upon closing later this year.
We expect the joint venture to be accretive on both an adjusted EPS and adjusted EBIT contribution basis with a contribution to EBITDA that equates to a six to eight times EBITDA multiple based on historical performance.
Investment will be accounted for as an equity method investment in our financial statements, which will reflect the impact of all revenue streams, including origination fees MSR gains and surface segment.
As we finish up the year, we see a continuation of strong trends that we've seen all year.
These trends combined with our strong performance in the third quarter resulted in us raising our expectation for both the fourth quarter and the full year.
For the full year, we now expect total consolidated revenue growth in the range of 18% to 20% year over year with brokerage revenue growth of more than 35% versus prior year.
Our non brokerage service lines are anticipated to grow in the mid single digits.
As a result of the revenue growth and our performance on driving operating efficiencies. We now anticipate adjusted EBITDA for the full year to be in the range of $800 million.
And even and push it and what the fourth quarter number might be.
Yeah, you're referring specifically to margin.
Yes.
Okay, Let me take a quick shot at it and hand it to Neil So the first thing I would say it is.
A little history lesson, which is.
Five years ago, when we put the business together, we talked aspirational eight at the time, we were trading about 758% EBIT margin, we talked aspirational of.
Sunday trying to get the business to something in the mid 11 range, maybe high 11 range and so where we sit today I would tell you his far exceeded that aspiration we.
We feel that the margins that we're producing now are really very very strong margins for business of this mix and the sore.
And really pleased with where we've taken those over the past few years and specifically this year, but in terms of forecasting margin I'll hand that to our CFO Tony <unk>.
Brett said exceptionally pleased at where margins have gone. This year, we are not going to provide any guidance right now for 2022, what I will say as we do expect continued margin expansion.
We will get both organic margin expansion and inorganic from the acquisition of Greystone.
Okay, Great that's helpful and then.
The second item just in terms of capital markets and how strong they have been in the U S.
Yeah.
[noise], Yeah, Tony we look constantly at all always wish to deploy capital certainly buybacks of one of the areas that we do continue to look at.
But.
We will evaluate that as we go forward and.
See whether that's the best way in which to deploy capital.
Okay. Thank you.
Our next question is from Stephen Sheldon with William Blair. Please go ahead.
Hi, This is actually the Patrick mckelvey on for Stephen but.
Yeah, you mentioned that the the Graystown JV should should be immediately accretive to to performance.
Upon closing and I just wanted to ask do you expect that to ramp at all or do you expect a full run rate EBITDA contribution upon closing and then kind of a second part to that.
You know in an environment, that's still somewhat remote.
Just what to ask if you could talk a little bit about how you plan to effectively manage the integration of those operations.
Between Greystone in Kashmir.
Sure. So first of all on the integration side.
Uhm.
What's what's really nice about this particular adventure.
Is that neither firm had what the other half and so the integration becomes very very simple there's no competition for space in America. There's no competition for clients in fact, it's quite the opposite I had the pleasure. This afternoon, it's happening to me. It was Steven Rosenberg here in New York, who runs the greystone business and he's been out on the road talking to our people.
The last two weeks in his level of excitement enthusiasm around was possible here on revenue synergies was was terrific to see first hand. So the integration. This one is going to be very simple very easy.
And it's really it's really a situation of more than anything else explaining to each firms sales forces how to work with the other but again no competition for space no competition for clients.
The business. We gave you the multiple we paid on the business on historical profit you should expect.
That multiple represents what we bring to the business and the following year.
Probably don't move the needle very much but theres no doubt that we are now beginning to see across the board improvement in leasing fundamentals and actually in the leasing revenues that are coming through the business as compared to prior year certainly this year and much of last year was a story of industrial so when you look across leasing revenues.
And this is true both here.
The United States, but also in Europe and in Asia Industrial logistics.
Is is the big driver at the moment that should be very good news for investors because historically, it's been office and so what youre seeing here as leasing recovers and you're seeing here and as these businesses recover.
That recovery being driven by those food groups that historically were not the biggest needle movers and so that that upside that we think about them coming years in coming quarters from office is yet to come however to your point or to your question. We're seeing many many green shoots in the office leasing sector, specifically I think most importantly.
Two things first and you heard this in the prepared comments first lease terms have now gone back to traditional norms. So we're no longer in an environment, where people are going out to the market and kicking the can down the road a year to wait and see what is going to happen, they're writing traditional lease terms, so $5 $7 <unk>.
10 years.
The second thing that we're seeing and we've seen this now for a couple of quarters is very very strong tour activity. So that's the actual taking a tenant out into the marketplace and showing them buildings I think of that it's probably a six to nine months, maybe a year lagging indicator to leasing revenues. It takes that long for a tenant particularly.
Commercial real estate every year is a more transparent asset class every year is a bigger asset class every year, you have more and more large institutions allocating a higher percentage of their allocated capital capital into commercial real estate all those are fairly structural fundamental dining.
Amex to support investment in commercial real estate now add into that the environment. We've been in the last few years with low rates and low yields all those things together as I mentioned to Anthony earlier creator a real perfect storm, where commercial high quality commercial real estate assets are just very very desirable.
Two institutional investors so.
Maybe I could be wrong on this but my guess is you are not seen any material increase in our trading volumes are the market's trading minds because in pending tax policy. There's certainly some at the margin, but our biggest institutional investors I really don't think this is a significant criteria for them on investing.
<unk>, that's very helpful. I'm, sorry for somewhat of a duplicate question two is fine.
So it would just one quick other question by our account is about 2.5 trillion dollars of commercial real estate mortgages maturing over the next five years.
R U C B C and you pull forward of refinancing of those loans just to lock in the low rates.
I guess I'm ultimately asking could that be an upside surprise to your earnings estimates.
Yeah, I did not not much I I think again, it's a massive asset class you'd you'd characterize it appropriately and accurately.
And we and we are the only firm that can take those tools in partnership with we work and deliver them to our largest corporate and institutional ownership customers now why does that matter.
Today, our largest corporate outsourcing clients will be card G. O S class. So these are multinationals with dozens if not hundreds of locations around the world those sorts bit out there work every four five years.
And the largest of those transactions are needle movers for us on profitability they matter a lot.
Those customers today.
<unk> list for that and how they're going to decide who they're going to hire two.
Two things are looking at among others, but I'll probably at the top of the list first is.
To follow on to some degree on this one but.
When you think about post COVID-19 and in terms of facilities and property management in general.
What kind of changes and asks have you seen now I think you've talked about this little bit in the past but.
I'm curious of.
How this business may be different from a competitive environment or just from the services provided in the future and how that may change the growth rates in this business going forward and if you could just remind us what kind of growth rates do you think that business should have over the next few years that would be helpful too. Thanks.
Sure.
Sure.
John get ready because I'm gonna come to you on the changes we're seeing in the.
The contract majors in F M and P M and what you think about the business long term, but I would tell you that we've always talked about growth rates in <unk> mid to mid high single digits. I think you can expect that to be the case.
For the foreseeable future I think.
Whats.
Really interesting about the business before I hand, it over to John.
The market's view of what is the definition of a full service offering has changed over the last two years to now include a flex offering as part of the base ask in any outsource and again, that's where we will benefit significantly from our exclusive partnership with we work.
Alright, great. Thanks for the color thanks, guys.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Patrick O'shaughnessy with Raymond James. Please go ahead.
Hey, good evening now that you spoke the companies are starting to sign long term leases again at a more rapid clip and they're thinking about their office floor plan layouts and build outs are you seen any tangible evidence yet that square footage per employee is going to start pushing higher.
That's a really good question John you want to take a shot at that and all of them have gone up some.
Data here.
The iPad.
I'm very happy to take it.
I have some data at hand the.
The world's sort of really started bearing down on the amount of office space. It was offering to each employee over very long period.
Up to 2010, it bottomed out just after the G. F C, where we reached a was felt to be a sustainable minimum of the amount of space you could happily give each employee in a sort of a gateway.
<unk> city.
Perfect. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Brett White for any closing remarks.
Great well, thanks, everyone for dialing in welcome or a new analysts who's covering us and we'll talk to you folks at the end of the fourth quarter you have a good holiday season.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Uh-huh.
[noise].
[noise].