Full Year 2022 Cushman & Wakefield PLC Earnings Call

Okay to the Cushman and Wakefield fourth quarter 2022 earnings conference call all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

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It is now my pleasure to introduce Megan Mcgrath.

Baxter relations for Cushman <unk> Wakefield Mcgrath.

Mcgrath you may begin the conference.

Thank you and welcome to Cushman and Wakefield fourth quarter 2022 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 that Cushman Wakefield Dot com.

Turn to the page in our presentation labeled cautionary note on 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, we will refer to non-GAAP financial measures as outlined by SEC guidelines.

Conciliations of GAAP to non-GAAP financial measures definitions of non-GAAP financial measures and other related information are found within the financial tables of our earnings release and the appendix of today's presentation.

Also please note that throughout the presentation comparisons and growth rates are to the comparable periods of 2021 and in local currency unless otherwise stated.

For those of you following along with our presentation, we will begin on page four.

And with that I'd like to turn the call over to our CEO John Forrester.

Thanks, Megan and thank you to everyone joining our call with me today is Niall Johnson, our CFO and I have also invited Kevin Shaw, our chief economist to participate in the Q&A portion of the call to provide insight into the macroeconomic and market outlook.

I am proud of the results, we reported today and I want to thank our team of exceptional professionals around the world.

22 was a year like no other and our team's ability to provide value to our clients in such a volatile times is a testament to their hard work on the strategic groundwork that we as a company have been laying to enhanced the strength and resiliency of our platform.

2022 was of course, a year or two contrasting halves with record results in the first half offset somewhat by the second half that presented considerable macroeconomic headwinds.

Despite the uncertain environment Cushman <unk> Wakefield reported strong results for the full year.

Fee revenue of $7 2 billion and adjusted.

EBITDA of $899 million growing, 8% and 4% respectively.

Record company highs.

Our 2022 results reflect the consistent execution of our multiyear strategy building a fully diversified global platform with a strong mix of highly recurring revenues.

During the year, we continued to invest in long term strategic growth areas.

<unk> and integrating six acquisitions and further enhancing our position in growing asset classes, such as life Sciences and logistics.

A few notable highlights of the year include an exceptional growth year for our occupier outsourcing business as we won and on boarded several of the largest available mandates.

Our new business pipelines continued to grow strongly with a mix of competitive second and third generation contracts and first generation outsourcing as corporates look to reduce costs.

We had a successful year with our greystone joint venture and we remain excited about this partnership continue to build out a full service multifamily platform to drive market share gains in what is now the largest asset class for institutional investors in the United States.

Additionally, we achieved double digit growth in industrial leasing while life Sciences leasing grew by more than 60% versus the prior year, both reflecting our prior investments in these key growth areas.

And lastly, despite the challenging environment in capital markets in the second half of the year, our overall market share for investment sales volumes in the U S increased 11 basis points in 2022, according to real capital analytics.

We finished third overall in total investment sales volumes, while moving up to second and fourth in the industrial and multifamily asset classes respectively.

Our ability to gain market share even during challenging times demonstrates the quality of our teams and the impact of our strategic investments in the highest growth sectors in commercial real estate.

These notable highlights were accomplished while further strengthening our balance sheet putting.

Putting us in an excellent position to take advantage of future growth opportunities.

Our industry remains relatively fragmented in many markets in times of volatility provided the opportunity to add depth to our global capabilities.

Attractive returns.

Now I want to turn to 2023, and how the year might progress.

We ended the year, having experienced a significant downward shift in transactional momentum experienced in our fourth quarter results.

Capital sat on the sidelines during the fourth quarter and is likely to remain there in early 2023 and.

In leasing the shifting macro economic resulted in lower overall activity across most asset classes.

However, long term commercial real estate fundamentals remain strongly intact.

There is significant dry powder available for deployment.

Market participants craved greater clarity on interest rate trajectory.

Order to facilitate price discovery.

We believe that economic green shoots such as continued moderation in inflationary data and a clear path for those critical interest rate policies could appear relatively soon.

Whilst the leasing market is likely to remain under pressure in the short term.

Anticipate demand for higher quality assets and locations to remain strong.

In addition, we expect that over the next few years, an elevated level of expiring leases roughly.

Roughly 300 million square feet per annum on par with levels observed in 2021 and 2022.

The office leasing market relatively active.

We also continue to feel confident in the scale of opportunity and the capabilities. We have built in other fast growing asset classes.

We expect continued positive absorption trends in industrial leasing in 2023 with employment and the industrial labor market over one 3 million jobs higher than pre pandemic levels and with E. Commerce third party logistics and global re shoring trends continuing to grow.

Our near term transactional market caution does not apply to our large recurring revenue service lines in.

In the fourth quarter of 2022.

<unk> FM businesses grew strongly up 8% versus prior year with solid growth across all segments of that business.

In particular, our project management business had a strong year as we helped our clients reconfigure and redesigning space, most notably in life Sciences.

We expect the positive momentum in our recurring revenue business lines to continue in 2023, demonstrating the power of our long term diversification strategy.

Looking across our large global platform I can give some additional color of where we believe market tailwind will occur in 2023.

We have a leading presence in greater China with Covid related restrictions now eased after a substantial term of muted activity.

We're expecting a solid recovery. This year. In addition, we expect the fast growing India economy continued to expand as the property market matures.

Europe challenges such as the Russia, Ukraine conflict resulted in difficult operating environment in 2022, especially towards the end of the year.

Looking forward, we are seeing somewhat better inflation data points in Europe , and we believe that ESG drivers and a flight to quality could provide some resilience in the leasing markets as the year progresses.

We have a world class team in Europe that was able to successfully navigate 2020 twos challenges and we are confident in their ability to continue to execute.

We have high conviction in our long term strategy and in the results of our investments in targeted growth areas designed to drive long term shareholder value.

Lines come to us for our exceptional expertise, our unrivaled focus on meeting their needs and our commitment to creating value and every engagement and they will continue to rely on us to navigate this complex landscape that we all face.

And our day to day operations everything we do is built around our four strategic pillars client center see relentless operating excellence.

Being a leading people and talent platform.

Increasingly leveraging our data with analytics that provide unique insight and value.

We are focused on exciting growth sectors with a complete suite of services and solutions to both owner and occupier clients around the world.

We are building market leading platforms in these secular growth areas as we continue to transform our business by operating efficiently and at scale.

All the while maintaining a focus on our client first culture and commitment to diversity equity and inclusion.

We have a well balanced business model and the foundational work we have put in place over the past several years positioned us for success in 2022.

Given the current economic backdrop, we are being prudent in our investment and capital allocation decisions.

Prioritizing long term growth areas, managing our cost base in order to drive further operating efficiencies, which Neil will touch on in more detail in a moment and positioning the business to emerge out of the current environment firing on all cylinders.

We have an experienced management team that has led through previous economic cycles and that knowledge base is invaluable.

We also have exceptional leaders and employees around the world proven in the execution of our business priorities we.

We have the platform the people and the expertise to continue taking market share and delivering value to our clients and shareholders.

And with that I'd like to turn the call over to Neil to discuss in more detail our financial performance Neil.

Thank you John and good afternoon, everyone.

For the full year, we generated fee revenue of $7 2 billion.

An increase of 8% over the prior year and adjusted EBITDA of $899 million, an increase of 4% over the prior year.

Contributions from <unk> FM in leasing growth as well as our greystone joint venture were largely offset by lower capital market activity Covid related restrictions in China, FX headwinds and higher Commission expense.

Adjusted EBITDA margins were 12, 4% a decline of 46 basis points versus 2021, which was generally in line with our expectations and guidance.

Adjusted earnings per share for the year was $2 a decrease of 2% versus prior year.

Looking at our fee revenue by service line for the full year PM FM revenues grew 12%, primarily driven by project in facilities management activity.

We're especially pleased with the performance of our <unk> business and the strong growth in our recurring revenues.

Leasing fee revenue grew 15% in 2022, driven by a steady recovery in the office sector throughout most of the year and continued solid performance in the industrial sector capital markets decreased 10% versus a record setting 2021.

Turning to the fourth quarter fee revenue of $1 9 billion declined 14% versus prior year the.

The decline in fee revenue reflects lower brokerage activity, which is most profound in capital markets as investors remained on the sidelines.

Fourth quarter, adjusted EBITDA of $220 million declined 35% versus a record prior year comparison.

The decline in adjusted EBITDA was principally driven by the lower brokerage activity.

Covid related restrictions in China, which continued to adversely impact our results in APAC adjusted.

Adjusted earnings per share for the quarter was <unk> 46 a.

A decrease of 51% versus prior year.

Moving to our fee revenue by service line for the fourth quarter performance across our entire PMA and service offering was strong, particularly in our project in facilities management businesses with PMA I mean total up 8%.

Capital markets fee revenue declined 52% in the fourth quarter with all segments declining with a record setting fourth quarter of 2021.

Leasing revenue decreased 10% versus the prior year.

Despite continued labor market strength, many office occupiers tempered decision, making during the fourth quarter, while waiting for increased macroeconomic clarity in.

In the industrial logistics sector, while absorption was down sequentially. The fourth quarter still marked our ninth straight quarter in which absorptions surpassed the $100 million square foot Mark.

Valuation and other declined 10% in the fourth quarter as a result of lower activity in our valuation business.

Turning to our segment results for the quarter Americas fee revenue declined 18% year over year with strong 6% growth in <unk> more than offset by a 9% decline in leasing and a 54% decline in capital markets.

Adjusted EBITDA of $163 million decreased $88 million versus prior year, principally driven by the lower brokerage activity and partially offset by the positive contribution from our <unk> joint venture.

In EMEA fee revenue declined, 11% with Pls and up 6% leasing down, 11% and capital markets declining 41% versus the challenging prior year comparison.

Adjusted EBITDA of 29 million declined 26 million versus prior year, primarily driven by lower brokerage activity.

In Asia Pacific fee revenue growth of 2% was driven by the performance of our <unk> service line, which grew 19% for the quarter, partially offsetting this growth were declines in leasing and capital markets, which declined 16% and 38% versus prior year, respectively. The declines were most pronounced in China as a result.

Covid related restrictions.

<unk> EBITDA of $27 million was down $14 million versus the prior year driven by the declines in China.

Moving to our balance sheet, our financial position remains strong we ended 2022 with $1 $7 billion of liquidity consisting of cash on hand of $645 million and availability on our revolving credit facility of $1 1 billion.

We had no outstanding borrowings on our revolver and net leverage was two nine times at the end of the fourth quarter.

Subsequent to the fourth quarter, we amended a portion of our senior secured term loan extending the maturity date of $1 billion of the $2 6 billion outstanding to January 31 2030.

Our goals with this refinancing were to extend the maturity of our debt profile, while also increasing the flexibility of our balance sheet by spacing out our maturities.

We achieved both of these goals with outstanding execution on the deal.

<unk> maturity profile, coupled with our ample liquidity puts us in an excellent position to pursue our long term strategic priorities.

Now moving to 2023.

Given the current macroeconomic uncertainty combined with a typical second half seasonality in our business.

Unrealistic for us to provide specific guidance at this time for the full year.

I would like to provide some high level insight as to how we're thinking about the business. This year and what we are planning for as a result.

Our recurring revenue Pms <unk> business is well positioned in the current environment to provide stability and we expected to generate low to mid single digit revenue growth in 2023.

In brokerage, we anticipate the environment to remain challenging in the first half of 2023 with brokerage declines similar to Q4 of 2022.

We do anticipate sequential improvement in the year over year brokerage trends throughout the course of the year with the timing and strength of these improvements depending on many factors, including the path of price discovery in capital markets and more clarity on occupier decision, making.

In addition, we expect that leasing declines will be less pronounced in capital market declines.

We'll provide an update on our expectations as clarity in the market improves.

Looking specifically at costs as a reminder, on average about 45% of our costs are variable, 40% of semi variable and roughly 15% opex.

Cost profiles vary by service line, but generally we would expect decremental margins of roughly 40% to 50% in brokerage and incremental margins of 10% to 20% in pm FM.

As a result, the anticipated declines in brokerage during 2023 will result in overall margin pressure, which will reverse as brokerage recovers.

As stated on our third quarter earnings call in the back half of 2022, our teams identified specific actions to drive further operating efficiencies we have already begun executing on these initiatives and anticipate achieving $90 million of cost savings in 2023.

We expect these cost savings to more than offset any inflation in our semi variable and fixed cost base.

However, they will not completely offset the temporary margin contraction from anticipated brokerage revenue decline as we believe it's important to maintain a strong position to grow share in the recovery.

Given these expectations for the year, particularly as it relates to brokerage revenue, we expect that the phasing of our EBIT contribution will be more back end weighted to the second half of the year similar to what we experienced in 2021.

In summary, I'd like to leave you with the following.

Although we are currently experiencing short term macroeconomic headwinds long term commercial real estate fundamentals remained strong.

We have developed a rigorous approach to scenario planning and cost management over the years and that focus and discipline continues in 2023.

And finally, two active balance sheet management targeted cost actions and strategic investments we are in a position of strength both for the anticipated recovery in brokerage and the continued growth in our recurring revenue businesses.

With that I'll turn the call back to the operator for the Q&A portion of today's call.

Thank you.

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing mckean.

To withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Anthony <unk> with Jpmorgan. Please go ahead.

Yes, hi, Thank you I.

I guess first question I, just want to understand the comments in the slide deck around brokerage declined in the first half and so if I think about the fourth quarter capital markets was down I think 53% so should we.

Take that as your view of what the first half of.

'twenty three will also be down in terms of order of magnitude.

And I guess same for Luis or Tony Yes.

Yes sure Tony at this point very difficult to project, what's going to happen even through the second quarter, but at this point as we have planned and done scenario planning and looked at the year.

We believe that that sort of a range for capital markets and that's a range for leasing is what are we planning for the first half.

We are expecting sequential improvement each quarter.

And so we expect that to improve especially in the back half of the year.

Okay, and then for PM FM, you did 8% growth I think in the fourth quarter and you said low.

Low mid single digits.

Is that I know you have a large janitorial business and so I was wondering if you could just break out sort of the growth embedded within that number.

Is that.

Janitorial kind of in that same ballpark or is that bringing it down a bit and just wondering how the core trends in that are working.

Hey, Tony This is John Yeah, So I'd look at the Pms.

As a whole there is no real specific difference in the short term dynamics between each of the central service lines that make up that.

Revenue what we've seen is a very strong 2022 as I said in the prepared remarks, we had a really outstanding year and some of the very large contracts that we brought on so therefore I'd guide you think about that business more over a period of two to three years driving that type of average growth as opposed to say last year being.

A blowout year, followed by a more muted one that's not how we see that business because.

Contracts come on they get them they get integrated and then we go through the sales cycle again, but ultimately a component to a pipeline, particularly.

Our sourcing business, which is growing very very substantially year over year makes us feel pretty good about the continued strong growth.

Okay. Thanks, Nick.

Can I ask one last one since I think we have Kevin on.

Just any view on where office market vacancy rates should ultimately settle out once leases are cycled through and sort of the new world for space uses kind of deal.

Dialed into People's footprints.

Yes sure appreciate the question I.

I guess, a couple a couple of points.

And now I'll lay out the forecast so I think just.

And thinking about the office sector. The outlook I think it's really important to recognize that office demand last year was it was beginning to stabilize and just sort of focus on the U S.

U S net absorption starting to flirt with positive territory in the first half of last year and in fact, a third of the markets that we track tracker are we're starting to absorb space again, even with remote work.

We're seeing all of these these green shoots stronger demand for space returned to office was trending higher not what it was pre pandemic, but trending higher lease duration, starting to normalize back to pre pandemic levels. So.

From my perspective, these green shoots where kind of confirming our thesis that.

Eventually sort of job the relationship between job growth and demand for space would reestablish itself. It started to do that but now when we look into this year right. The baseline we are anticipating a mild recession risks are high a high <unk>.

Mild recession and typically during periods like this business as they look for ways to cut cost and get more efficient with head count in spades, that's just sort of the recession playbook will that actually happened in this cycle.

Certainly seeing it in spots the tech sector for example, but will that be a trend across the board I think that's really hard to say I think it really worth noting that businesses have already gotten a lot more efficient with their space since the pandemic started and if the mild recession is truly mild that may not translate into enter significant job losses.

And I think we also mentioned in the prepared remarks that demand for space and somewhat inelastic businesses need space to operate their business and there is always a regular churn in leasing and what we're tracking is a significant number of leases expiring over the next couple of years.

Baseline outlook for office vacancy at 18, 2% in the U S. We have that trending to 20%.

Through the recession, and then stabilizing and trending lower from that point forward.

Great Thanks for that.

Our next question comes from Matt.

Matt <unk> with Goldman Sachs. Please go ahead.

Hi, This is Jonathan Chang from Goldman. Thank you for taking my question I'd like to talk about the $90 million cost savings that you talked about briefly what are the areas.

We're targeting what are the temporary actions and then and one of those segments, that's going to be more most impacted.

With these actions.

Sure.

The majority of those costs are permanent costs and they focused around efficiency, so rather than just going in.

But just doing temporary cuts or randomly taking up cost we've been very very focused to make sure that business stays strong and we continue to drive our efficiency.

Remember we.

Especially Germany has been a three year journey and so this is just a continuation of that.

Really spans all costs in all geographies.

One more thing on that China is it intuitively course you'd.

You will be focused on taking cost out of the dot com.

With your business, which is going through low volume period.

Interestingly of course, the brokerage business is actually a very light cost business.

If you were going to drive.

Very very substantial cost savings to try to cover all the decrement of.

Revenue falls in transactions, you would actually have to cut hard into the.

The infrastructure Thats driving the growth on the services side that will be the case for all organizations like us with a diversified model. So the key for US is to ensure that we focus on.

Stripping out say inflation, that's coming through our own service suppliers.

And then the work that we do.

And allow ourselves to maintain.

A world class workforce, so that we come out as I said in the prepared remarks firing on all cylinders.

Because we do believe the fundamentals are absolutely in place for a strong recovery at some point.

Got it and as a follow up I'd like to talk about leverage a little bit how do you think about your leverage target.

In 2023, where do you think leverage is going to track is there going to be some cadence that we should think about and then as a follow up within that you're obviously recently amended a portion of your term loan.

Could you discuss how we should think about your interest expense in 2023.

Sure. So let me unpack that a little bit if we look just leverage our long term target for making attacked our leverage over the long run is to be in that two to three times range.

We ended the year at two nine times well within that range.

Going into 'twenty, three with an expected decline in EBITDA, you will see that leverage temporarily move up.

But I think what's much more important is liquidity, we have of a $1 $7 billion of liquidity. So we feel like arena, a very strong position from both a leverage and liquidity standpoint.

Terms of the extending the term loan B, we just saw a unique opportunity in the market as we came into the year. We've got a $2 six we had a two six turns out to be.

That's expiring in 2005, and so we do have time.

Coming into the year, we saw spreads move in and we saw a lot of demand.

For our paper and so we had a very successful transaction, where we just pushed out $1 billion to 2030.

There was really just to space out our maturities.

And give us a very flexible balance sheet.

Randy has strengthened.

Our balance sheet overall.

In terms of interest rate cost at the increase from that was very small 50 basis points, so less than $5 million surplus very cost effective in terms of the transaction itself. However, we will see interest go up slightly in 2023, just because of sofa increasing.

But I would remind you.

That about 80% of our debt on a net basis fixed.

That does provide.

It does reduce the impact of floating rate debt.

Excellent. Thank you.

Our next question comes from Stephen Sheldon with William Blair. Please go ahead.

Hi, This is Pat Mcafee on for Stephen.

So as a follow up to Anthony's question in John's response to it sounds like everything is going well and the PMA business.

And understand its a pretty unique operating environment, but.

Given the guidance is there some conservatism baked in there or what factors were you considering one building that sort of what was a pretty strong quarter and year for that business here.

Thanks for the question.

<unk>.

Something that we think about what we are by nature.

To guidance, particularly in an environment like this.

A lot of that.

The growth that comes through in the PM FM.

Our business is based on wins and contract changes in a given year. So sitting here in January yes, we've got a very strong pipeline, we feel good about our ability to retain and win business, but ultimately the success rate within that retention and renewal.

We will make the difference of the 100 to 200 basis points here or there. So the guidance. We've given we feel very positive that we will achieve more than that will be because we do continue to take market share, but it's based on the availability of contracts at a given time and when they are on boarded.

To give you an idea.

Flat sourcing markets.

The pursuit of a contract a.

Bid out we'll renewal can be as long as 18 months.

So really we are bidding on contracts today that won't show up as revenue until potentially the back end of 2024.

On a much shorter timeline and could show up as soon as Q2. So that's just really webby, we'd give caution caution to that guidance number at the beginning of the financial year.

Mhm, Okay. Thank you.

And at a higher level.

The trends in returning to office seemed to kind of plateau a bit.

The future work looks a bit more hybrid in nature can you just talk about how that impacts your longer term outlook for both leasing and the PFF in business.

And also is there anything you can share on your exposure to office properties and.

One or both of those business lines.

Happy to I'll talk about the office sector with regards to how they show up within the organization on I'll pass over to Kevin.

As ever have more ready data on the market as a whole.

What we've seen and I think this is this is typical of our pay as the proportionate revenues.

Sure.

Derived from office activity right across the platform from transactions also within our <unk> business.

Pre pandemic compared to now have been falling.

Primarily as the size of the other asset classes has been growing so actually our revenues are very strong still in office, but as reported they've gone from a small majority.

50% to just below 50% over the last 12 months or so and we expect that to continue to fall as proportion.

Even though we may well see growth in our office derived revenues over time, we've been successfully taking market share we see opportunities to build and grow teams still in offices in markets, where we are underrepresented.

And we have very high quality teams, who are maturing and growing and our ability to penetrate and win.

I would just guide the office will remain fundamentally very large part of our portfolio, but ultimately become less the anchor over time, particularly as multifamily and industrial continue on that secular long term growth.

Kevin have you got any observations about actually the the return to the office.

<unk> yeah.

So.

So if we kind of go back to January of last year.

During the omicron, Serge roughly 18% of workers or at the office at any given day I think I mentioned earlier that is now hovering closer to 50% and if you do just back of the envelope math on that.

That indicates that there is roughly 9 million more people back at the office in the U S on any given day versus the same time a year ago. The.

Pre pandemic norm was closer to 70% I'm not sure we'll ever get back to that point again.

A recession potentially M&A with the pandemic seemingly saying we are seeing more companies assert their desire to have people back in the office more regularly I do think that's important to the office recovery and I do expect the office attendance in person attendance to continue to drift higher.

And we'll just add even if even if we just say 50% is the new norm.

Let's just if we assume that business is still need to accommodate for when there is going to be more than 50% in the office at any given day and I think in particular.

Peak space needs for the days when you lap the maximum number of employees in the office for teamwork and communication and so forth, that's ultimately going to drive.

Demand for office space, and so we do have occupier occupier space the amount of occupied space continuing to grow through the end of the decade right at this point, which means just the office leasing Pi also grows it is going to be more concentrated in the higher quality segment of the market.

So hopefully that answers your question.

Yes, definitely it's very helpful. Thanks, Kevin and thanks John .

Your next question comes from Michael <unk> with Citi. Please go ahead.

Great. Thanks, maybe switching to more of those non traditional real estate asset class. So you've got exposure to I think of lab office I think of the growth in logistics I know you've talked favorably about data centers in the past.

I mean, how much across your existing business segments do you expect this to grow as sort of a percentage of the pie and then any commentary about positive secular trends you're expecting in the near term would be helpful.

Okay, I'm, probably going to toggle list with Kevin again, who will have the data to hand more specifically.

I'd make a couple of comments I think.

He'll bring in potentially.

The level of activity, we're seeing from sectors in office I think there is.

A lot's been written them said in the last few weeks about.

The utilization of office, particularly by the tech sector and the layoffs that were seeing there and then what's the impact of that on.

On the office market I would say there is.

Throughout I'm afraid what has become very long career working in offices I've seen there's always been a particularly driven sector engine that has driven the market.

It was just before the millennium in 2000 financial services, particularly investment banking was driving very large proportion of high quality office uptake globally professional services.

Just after the GSC became the big driving engine of office growth and then we've seen technology of course over the last 10 years has been trying to there's always been a growth engine and what we're seeing now actually is the diversification view speeding the drove the growth engine.

So ultimately.

A lot of the absorption that we're seeing in the alternative classes like Datacenters last mile logistics.

<unk> Sciences.

Is accommodation, which would ultimately have been offices in prior cycles and saw strong fast growth markets.

If you can take our own revenues from life Sciences. This year with a 60% increase in revenue year over year, you've got an idea of the rate of growth in these markets.

They're going to be taking the place as the engine of growth of St technology. So overall, we still feel relatively positive about the office sector as a whole because as Ed.

<unk> has always been some drivers of demand growing.

Some becoming more muted within that from pass holders, Kevin <unk>, probably got some some far more accurate data.

Yes, yes sure.

A couple of data points that I think might be helpful. So first just on high quality office.

So since the pandemic started in the U S over 100 million square feet of space has been absorbed in the highest quality segment newly built sustainability features prime location positive absorption in that space.

I think really interesting is there is in terms of the office stock in the United States less than 10% of the inventory actually qualified as the highest quality product. If you just think about what a massive opportunity to reposition office assets sort.

Sort of make move them up the relevancy curved.

That office industrial logistics I would say, there's just there's no evidence so far that theres been any slowdown in demand trends and aggregate that globally.

In the U S.

Neil mentioned in his remarks very strong absorption in Q4, Q4, very low vacancy and EMEA same very low vacancy rate three 5% and Canada actually was a record quarter of absorption.

Vacancy under 2% in Canada.

We have to be mindful of the recession and keep a close eye on the demand drivers e-commerce, the state of the consumer and so forth, but the long term tailwind there are very strong for industrial logistics over time E. Commerce will continue to grow in the U S and globally more people shop online.

Demand for last mile States will remain spheres, given the sort of the push to get products to the people as quickly as possible to the consumer spending pie will continue to grow. So there's a lot of reasons to be bullish longer term on industrial logistics and certainly our investor clients. Our retail has been a surprise.

Still very strong pent up demand for experience, even as we go into maybe an economic downturn.

Very strong fundamentals in retail vacancy is the lowest it's been in 10 15 years, there is rent growth and retail multifamily.

Another darling for investors sort of regardless of cyclicality people need a place to live and household formation is only going to continue to grow multifamily by the way is the number one asset class now in the United States and growing very quickly globally.

And the rest data centers, clearly very cyclical strong demand drivers for that that sector do you think about data consumption and how that's growing.

So yes.

Confident in the long term tailwind in the fundamentals and we're all and Kevin on that let's call. It the 10% highest quality. Those are that's trophy buildings class a stock you mentioned the vacancy expectations I think 18% for this year, maybe go into 20% next year and then declining for the overall market do you have a sense of what that is.

For that that highest end of the of the markup.

About half.

If you look at if you isolate the newly bill.

Yep.

I'm newly built prime sustainable.

Features all of the key features of what how we define prime office vacancy in that product is somewhere between 10, and 12% and it's lower than that in some of the some of the key cities, it's lower than that in Manhattan for example.

In other markets.

Got you and then just maybe one last one sort of on your general macroeconomic outlook for 'twenty. Three I think I think you might have mentioned in the prepared remarks anticipation around <unk> and <unk>.

And at some point this year, that's probably no surprise, but just wanted to get your thoughts maybe Kevin and this one is best cared for you.

And where you see inflation, maybe getting towards the back half of this year expectations around.

Rates, peaking at some point and any additional commentary there would be helpful.

Yes sure so.

Would just have to preface than I think any forecasters should right now the situation is very fluid lots of unknowns are forecasting.

Very difficult time heightened uncertainty our baseline does call for a mild recession and the indicators I am studying still very much point to that that the yield curve remains firmly inverted confidence is down stubbornly high inflation, which you mentioned and other indicators pointing to that.

So in terms of CPI inflation, there's good news there both in the United States and Europe .

Inflation appears to have peaked it was June of last year in the U S. At around I think it was 9% on the nose and that is now trended lower too.

Six 3% was the latest reading on headline inflation year over year in January .

That is heading in the right direction, but we still have the wage pressure wage pressures there and so I do think it's going to be very difficult for inflation.

To get back to target until until we do see the labor markets cool off and that is going to take time. So we have we do have CPI inflation trending lower towards the end of this year, finishing in the U S and that's three 5% to 4% range.

What that means for the 10 year Treasury yield as we model. This as we have it hovering in the.

In the U S and the three five to four 5% range for the next 12 months and then we have it settling in at three 5% beyond that.

Our expectation is that growth will resume in 2024 that the recession will be over in Q4 of this year.

And would point to a pretty.

Pretty good confidence in that because of the strong underlying fundamentals going into this some of the strongest fundamentals at ever seen as we enter into a potential recession. All of the things are commonly cited household balance sheets are in excellent shape strong excess savings. So I do think once we get past the inflation problem. The fed will then pivot to lowering rates.

I think in 'twenty early 'twenty 'twenty four and that's when we should see the economy start to rebound.

Got you that's it for me I really appreciate it thanks.

Our next question comes from Doug Harter with Credit Suisse. Please go ahead.

Hi, it's will on for Doug Tonight.

We're just curious.

You guys had.

You guys have had any.

Early conversations or signs of early conversations with buyers or sellers in the market that give you any real sort of how can you get out of the markets might perform in the coming year.

Is that is that question aimed at the capital market side.

Yes.

Okay.

We've seen so far this year across all markets and all.

Sectors and all geographies from capital markets is actually up.

Remarkably level of positivity from investors.

There is the very significant amount of dry powder as we mentioned many times on these calls and in our.

Our peers.

It seems to be a very clear view that as the fundamentals become transparent that there will be high levels of activity.

In both sales and acquisitions, so the fundamentals of.

Global capital markets remaining a very large opportunity for us remains extremely strong it's really doesn't matter of when.

Which point whether that is the back half of this year potentially even later depending on the outcomes of Kevin mentioned, but ultimately what we're seeing on a client by client conversation basis <unk> been in many of the largest investors in the world in the last couple of months.

I'm ready to deploy.

And deploy in a very large scale.

Okay.

Okay, great. Thanks.

Okay, and if you'd like to ask a question. Please press star.

One our next question comes from Ronald Camden with.

Morgan Stanley . Please go ahead.

Hey, just two quick ones.

So just trying to connect some dots here so looking at the guidance.

For PM and ask them the revenue expected in the low to mid single digits.

But I think I also heard your earlier comments that the.

Incremental margins for <unk> would be detrimental.

I think thats, what I heard.

Yes. My question is if I'm just thinking about.

<unk> adjusted EBITDA number.

Is that are we supposed to see that as sort of a flattish or maybe even <unk>.

Without sort of giving guidance, obviously, just how should we think about.

How that flows through.

Yes, just to just to be very clear.

We do not see Decrementals in when we were talking about Incrementals on the services side. So the contribution margin as we grow our services business is in the 10% to 20% range.

Just to providing that as a contrast to the decrementals from CES brokerage declines.

And just giving guidance on the expected mix change in revenue, especially as we go through the first half of the year. So very clear, we do expect growth in EBITDA.

Services business.

Got it so for the PMA.

Basically sort of similar growth on the EBITDA line as the revenue line is that sort of.

Got there yet.

Excellent.

And then my follow up question is just I guess my second question just tying this to sort of cash flow, maybe can you remind us.

In terms of the conversion rate from adjusted EBITDA.

To sort of a <unk>.

Free cash flow or operating cash flow number whatever you prefer what that would have been historically and then how does that.

Hottest 23 impact like how should we think about that capture rate changing.

23, and going forward. Thanks.

Yes, as we've said before.

I will now turn.

Free cash flow conversion rate and when I say free cash flow conversion I'm, referring to conversion from adjusted EBITDA since not from earnings from EBITDA.

Conversion rates are targeted 30% to 40%.

As we've said as we look at cash flow given the changes that we see during the years, especially over the last two years, where we saw very.

Strength in the first half weaken.

Weakness weakness strength.

One really has to look over a cycle.

So as we give that guidance.

30% to 40%.

A much lower range guide.

That is over the cycle. So it's over a multiple year period, if we look back historically at the last two years. So we look at 'twenty, one and 'twenty two as you look at that free cash flow conversion.

It was slightly below 30% or around 28%, but right in line with the guidance that we gave earlier last year.

And as we look then to 'twenty three we would expect that conversion to be lower given the fact that we expect to see.

Weaker brokerage at high margin in the first half of the year and then we will grow into those ranges over the cycle.

Great. That's it for me Thank you Super helpful.

Great.

This concludes our question and answer session I would like to turn the conference back over to John <unk> for any closing remarks.

Thanks to everybody for joining our call today to 2022 full year results.

As we said it was a strong year. Despite the challenges and we believe 2023 is going to be another challenging year, but one which we are very well positioned for weather.

Whether long term fundamentals of our industry and our position within that industry remains strong.

As a company we are energized by the opportunity that the volatility in complex markets provide in the microenvironment, we always end up taking market share and coming out stronger.

In periods like this so the benefit of the device the scale of the diversified platform makes us feel very good about the opportunity to continue to grow the organization lean into our strategy and drive outsized returns. So thank you all for joining and speak to you next time.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.