Cushman & Wakefield PLC

NYSE:CWK

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to Cushman & Wakefield's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Megan McGrath, Head of Investor Relations. Please go ahead.

[Megan McGrath, executive]

Thank you, and welcome to Cushman & Wakefield's Third Quarter 2024 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.cushmanwakefield.com.

Please 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 forecast and estimate 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. Reconciliations 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 2023 and in local currency, unless otherwise stated.

And with that, I'd like to turn the call over to our CEO, Michelle MacKay.

[Michelle MacKay, executive]

Thank you, Megan. This quarter, we continued our track record of successful execution against our goals, driving top line growth in targeted investment areas, continuing to deliver strong free cash flow conversion and focusing on value creation through deleveraging and seeding for growth. This quarter also marks an inflection point across many areas of our business.

Over a year ago, we began to make strategic targeted investments in leasing, informed by our view on the most promising opportunities across asset classes and geographies. These investments have translated into clear and measurable results.

The third quarter marks our fourth consecutive quarter of year-over-year leasing growth and our highest leasing growth since Q2 2022. We have also reported the first quarter of Capital markets growth in the Americas since the second quarter of 2022. We are seeing a broadening of capital markets activities in the market and increased optimism amongst buyers and sellers.

The Fed rate cut in September and actions by the Central Bank outside of the U.S. have been important first steps in the revitalization of the capital markets. The further easing of monetary policy should continue to catalyze growth in the coming quarters.

We also achieved an important milestone in reducing our leverage. In October, we fully extinguished our roughly $200 million in 2025 debt maturities, as we had pledged to do, well ahead of schedule. This was made possible by the outstanding work of our global teams to drive free cash flow. Solidifying our balance sheet and improving our cash flow were key early priorities in our strategy to position the company to take full advantage of future growth opportunities, and we executed on this priority 6 months ahead of plan.

Looking forward, leverage reduction will continue to be an important part of our capital allocation strategy. But as we shared with you last quarter, we have already begun accelerating our growth investments as we pivot to more offense.

Now I'll turn the call over to Neil for a review of the financials, and then I'll come back to share a bit more about how we are positioning strategically for the future.

[Neil Johnston, executive]

Thank you, Michelle, and good afternoon, everyone. Our third quarter results highlight improved momentum in several areas of our brokerage business as well as our continued commitment to strengthening the balance sheet and protecting margins as we accelerate our growth investments.

Turning to our quarterly results. Fee revenue for the third quarter increased by 3% year-over-year. Leasing revenue increased for the fourth consecutive quarter, and we experienced positive Capital markets revenue growth in the Americas for the first time since the second quarter of 2022.

Adjusted EBITDA of $143 million declined 5% driven primarily by the impact of our recent Services divestiture as well as roughly $20 million in higher compensation costs compared to the prior year. On a year-to-date basis, adjusted EBITDA of $360 million is up 1% versus last year.

Adjusted EPS of $0.23 is $0.02 higher than last year, benefiting from interest and tax savings.

Taking a closer look at our service line results, our Leasing business continues to perform at a high level with revenue growth of 13% in the quarter. Leasing strength remains largely global in nature. Americas Leasing was up 16% with double-digit growth in both office and industrial. APAC Leasing grew 13% driven primarily by strength in India and Japan. EMEA Leasing, while down 8% in the quarter, remains up 5% for the year, which we believe is indicative of a relatively stable market.

In Capital markets, we saw a return to growth in the Americas for the first time in 9 quarters, with revenue up 2%. We experienced growth in office, industrial and retail transactions during the quarter. Overall, sentiment has improved in the past several months. And while some market uncertainty persists, we feel confident that we've passed the floor in U.S. Capital markets activity.

Looking internationally, EMEA Capital markets revenue declined 5% as the market continues to experience some lumpiness on the road to recovery. Year-to-date, EMEA Capital markets revenue has grown 3% as fundamentals continue to improve gradually.

APAC Capital markets revenue declined 44%, principally due to the deal timing and strong third quarter in the prior year. Our pipelines in this region remains strong, supported by positive secular trends, and we expect a rebound in activity for the region in Q4.

Turning to Services. Revenue growth was up 1%, excluding the impact of the divestiture, or down 2% as reported, in line with our expectations. In APAC, Services revenue increased by 6% as facility services and project management in India and Australia continued their momentum spurred by investment into the region. In EMEA, we've continued to focus on margin by restructuring our fixed price design and build business. Our transitional work on that business is essentially complete, and we expect to return to growth in the fourth quarter. In the Americas, Services revenue was up 3%, excluding the divestiture, or flat as reported.

Facility services and property management grew while project management declined as office expansion and renovations continue to be delayed. We remain highly focused on reaccelerating growth in our services platform in 2025.

Turning to cash flow. Free cash flow for the quarter was $187 million versus $174 million in the third quarter of last year. Our year-to-date free cash flow continues to compare favorably to 2023, improving by $146 million, and our trailing 12-month free cash flow has grown by approximately $100 million. Our free cash flow improvements this year have enabled us to execute on our deleveraging plan well ahead of schedule as well as begin incremental investments to accelerate growth for 2025 and beyond.

During the quarter, we repaid $50 million of term loan debt due in 2025. And subsequent to quarter end, we repaid the remaining $48 million, fully extinguishing our 2025 maturities. We also completed another successful repricing of $1 billion of term loan debt due in 2030, lowering the applicable interest rate by 50 basis points.

Lastly, moving to our full year outlook. On the revenue side, we're raising our 2024 Leasing revenue growth expectation to mid-single-digit growth from low to mid-single-digit growth, primarily based on the third quarter's strong performance. We continue to expect Capital markets revenue to improve sequentially and expect fourth quarter revenue growth of approximately 20%. In Services, we continue to forecast flat organic revenue growth in 2024, with a target of returning to mid-single-digit growth in 2025.

On cash flow, we expect to finish the year within our previously stated 30% to 40% free cash flow to EBITDA conversion target. For reference, that translates to a roughly 80% free cash flow to adjusted net income conversion.

In conclusion, we are extremely pleased with our continued execution against our strategic priorities. At the beginning of the year, we outlined our 2024 financial strategy to reinvest cost savings into the business, protect margins and position the company for growth. Year-to-date, adjusted EBITDA margins are up slightly. Brokerage revenue is up 3% and free cash flow has expanded by over $145 million. We completed 3 debt repricings this year and fully prepaid our 2025 debt maturities, solidifying our balance sheet as we focus the company on growth.

With that, I'll turn the call back over to Michelle.

[Michelle MacKay, executive]

Thanks, Neil. Many of you have asked for more detail on the outcomes of the strategic work we have engaged in over the past year. I thought I'd give a few examples to help demonstrate the drivers of our recent success as well as where we see opportunities.

What you'll hear is that the themes of our work have been interconnectivity and rigor. And when we combined investment dollars with analytics, accountability, focus and an empowered team, we are winning. For example, our multi-market account team has seen incredible success this year, partnering with our internal data analytics and services teams to provide unmatched integrated services to midsized companies that are looking for advisory solutions and brokerage execution. Our RFPs are up over 50% in this year.

Internally, part of our roughly $145 million improvement in free cash flow this year came from identifying opportunities to improve receivables collections. We created cross-functional brokerage and finance teams, which broke down internal silos to get the work done.

Additionally, we are making targeted investments to connect talent, data and technology across our platform to drive both efficiencies and revenue opportunities. For example, we have identified opportunities for meaningful labor management improvements, especially in our Services businesses. Strengthening these capabilities allows us not only to better manage costs but also enhance our global platform offerings. With a focus on talent, we have already achieved a 260 basis point improvement in top talent retention over the past year.

Looking forward, our capital allocation priorities will be focused on three main categories: one, funding and fueling our brokerage business while leaning into the capital markets recovery; two, reaccelerating Services revenue and profitability through organic investments and tuck-in acquisitions; and three, we will continue to deleverage opportunistically in balance with our growth objectives.

As a company, we continue to mature and with a more diligent and focused operational mindset, we are uncovering opportunities to fully optimize our operations and go-to-market strategies. This, in turn, is creating optionality for growth, and we are more energized than ever about where we can drive this business in the future.

Now I'll turn the call over to the operator for your questions. Operator?

[Operator]

[Operator Instructions] Our first question today is from Stephen Sheldon with William Blair.

[Stephen Sheldon, analyst]

Really nice results here. I wanted to start with a clarification question. On 20% growth for Capital markets in the fourth quarter, is that year-over-year growth or sequential?

[Neil Johnston, executive]

Yes, that's year-over-year growth, Stephen.

[Stephen Sheldon, analyst]

Okay. Great. Just want to make sure. And then in Services, I think you talked last quarter about confidence about getting back to mid-single-digit organic growth next year in 2025. So just curious, what's your level of confidence now? How has that changed? And what are some of the factors that investors should be thinking about that will help you drive that acceleration?

[Neil Johnston, executive]

Sure. I'm happy to take that, Stephen. Look, we continue to feel very good about reaccelerating growth based on what we're seeing in each of our businesses. The best way to think about it is to sort of break it up into each of the pieces, and that hopefully will help you understand exactly where we're working.

So one of the key components is facilities management. This is our largest business in the APAC region and we're very strong there. On a year-to-date basis, that's up 7%, and that business continues to perform very well. We're expanding our client base there in all the regions. And as an example, we are the largest facilities management provider in Singapore, which is one of our key markets.

If we look at our facility services business, that too is growing. It's growing in the low single digits, but we feel very confident we can grow that organically as we look forward. We've done a lot of work on establishing healthier contracts in that business, and we're starting to feel the impact now. And our business development pipeline there is strong.

The other business that we are most excited about is our global occupier services business. That's had some really nice wins recently, and we see a lot of potential in fully integrating our businesses with the GOS business. That business is more longer term, so that will take longer to translate the wins into the positive revenue growth but certainly an area that we are very, very focused on, and we see a nice growth path there.

And then property management or project management, those have slowed a little bit more than expected this year. It's primarily in multifamily, and it relates also to project management. The project management side of the business tends to be shorter term in nature. And so that will give us a lift as we start seeing stronger Leasing and Capital markets. And then our property management business is a business that has just done exceptionally well, and the pipelines there are also good.

So overall, we see tremendous opportunity in the Services business. And as we look at pipelines, 2025 will be a key year for that growth to start happening.

[Operator]

The next question is from Ronald Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

I had the same question on the Capital markets 20% growth. Maybe asking it in a different way because I think it does imply some sort of reacceleration here. Is it the pipeline? Is there a larger deal in there? Is there a geography? Just sort of any color on how, 1 month into the quarter, that 20% sort of came about would be helpful.

[Neil Johnston, executive]

Yes. So as we look at Capital markets, we're looking at the pipeline. We're looking at basically the deals that are starting to come through. As you know, it takes sort of 2 to 3 months just for that business to really develop. And as we look at the early momentum there, we feel very good about what we're seeing in all regions.

[Michelle MacKay, executive]

And I would say, as we said in the past, we're expecting this to be a long multiyear recovery in Capital markets. In our last earnings call, I referred to it as a waterfall effect, with the market producing more and more velocity and volume over time.

[Ronald Kamdem, analyst]

Okay. Great. And then my second question was just going to be on sort of just looking for high-level commentary on the margins. You talked about sort of the mid-single-digit Services growth and the Capital markets recovery. Just high level, are you guys thinking about margins impact sort of any differently as those businesses sort of perform?

[Neil Johnston, executive]

Yes, sure. So this year, we've been very focused on protecting our margins as we sort of move through the recession. So as we came through the beginning of the year, what we said was basically we were going to offset any inflation with cost out. We've now progressed from that. We're starting to see the business turn, we really are, and feel like we're at the bottom of the cycle. And so we are, at this point, not giving any guidance on '25.

But the way to think about the business is, as the brokerage business comes back, the incrementals there are very strong, but those incrementals certainly in the near term will be slightly below what we've seen before as we reinvest in the business. And so once again, as we go into next year, certainly early on in the year, we'll defend our margins but we'll also be looking to invest some of that opportunity to make sure that we are well positioned for growth. We think the cycle is going to be a long one. And so we want to be very, very well prepared for it as we go through the year.

[Operator]

The next question is from Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

Maybe, Neil, staying with you on the margin item. I have in my notes from last quarter that the third quarter numbers would be negatively impacted by some comp expenses on the margin side, I think, to the tune of, I think, over 150 basis points. Can you maybe help us just update like what the impact ended up being and how to think about 4Q and the full year at this point?

[Neil Johnston, executive]

Yes. Good question, Tony. So we guided to roughly $20 million to $30 million of headwind. We actually saw the low end of that $20 million, and the teams did an excellent job of basically matching costs to ensure that we held margin. We'll probably see a little bit more in Q4, not at the same level, probably in the $5 million to $10 million range, so not nearly as material for Q4.

[Anthony Paolone, analyst]

Okay. Great. That's helpful. And then I guess on the Leasing side, going to like mid-single digits, if I just do some of the math there, it suggests that 4Q Leasing revenue would be up basically mid-single digits as well. And so I guess my question is, how should we think about maybe what normalization in Leasing looks like? Was the third quarter just outsized and that number comes down now? Or is there more room to go? I'm just trying to put some brackets around that.

[Neil Johnston, executive]

Yes. So Leasing, as you know, is a big part of our revenue. It's something, which we've been saying now, we've got 5 quarters of strength in Leasing. So it really drove great performance. The Americas alone were up 16%. We did have some big deals in the quarter, which also helped and contributed. And there is lumpiness as we go through the quarters. We've always said, to look at an individual quarter is probably not the way to look at it, you really look over the longer run. And so certainly feel good about how our Leasing revenue grew.

[Operator]

The next question is from Michael Griffin with Citi.

[Michael Griffin, analyst]

Just wanted to go back and get some more color kind of on the transaction activity in the market and what you're seeing. Can you give us a sense if maybe buyer and seller expectations are converging or if a lot of these deals are mainly kind of debt maturity and distress-driven?

And then I note that you noted in the release kind of about the Greystone joint venture volumes declining as a result of the tighter lending conditions. I would think that debt capital availability would be important if you're going to see increased transaction activity. So how do you kind of marry the expectation for a transaction activity pickup with what seems like some tightness in the debt markets?

[Michelle MacKay, executive]

Okay. So I'm going to start with this, and then I'll hand it over to Neil. In terms of market and market fundamentals, we continue to be optimistic about recovery. The Fed move in September was a really important first step for us. There is an enormous amount of pent-up demand waiting, and we believe we are positioned exactly where we need to be to handle that. And future Fed rate cuts, which we know we probably have one coming this week, mean that floating rate debt is going to continue to get cheaper. With all else equal, that should help some deals across the finish line, especially as we go into year-end and year-end pressure and may help alleviate some other debt service challenges that they've been having.

And I think most importantly, at least symbolically, the rate cut signals that better days are ahead for commercial real estate because it means that policies become slightly less restrictive, which is a step forward to more supportive financial conditions for the economy and, by extension, more supportive conditions for leasing and capital markets. And lastly, these incremental rate cuts, which we anticipate one in November and one in December, is going to help move some of this dry powder off the sidelines because, again, it signals that the commercial real estate sector is likely at the cusp of the next growth cycle. And what we've seen is a real step forward in the investor mindset from risk off to risk on.

And then, Neil, did you want to talk a little bit about Greystone?

[Neil Johnston, executive]

Certainly happy to talk about Greystone and what we're seeing in the multifamily markets. Greystone, as a result of the change in lending policies at the GSEs, we have seen some tightness in lending in that space. But we're seeing opportunity in multifamily. We basically had a very strong month of mortgage originations in September. Greystone saw that. And so it signals that certainly there may be opportunity coming. At the same time, it's 1 month, and that's not a trend. So multifamily remains an area we're watching closely. We feel very good about it in the long run. It's a key strategic space for us. But certainly, we do expect a little bit of lumpiness as we move through the back of the year and into next year.

[Michael Griffin, analyst]

I really appreciate the context there. And then, Michelle, just going to those three priorities you laid out kind of at the end of your prepared remarks, I appreciate kind of the additional insights there. But as you think about those three, I know you've done work on the leverage side, really improving the balance sheet and cash flow, but if the first two priorities in terms of pivoting to growth are really what's going to be a catalyst, could you see leverage maybe stay elevated relative to the historical levels if it makes sense to grow the enterprise?

[Michelle MacKay, executive]

Yes. I don't anticipate increasing leverage. I would say, just to give you a little more context around the capital allocation, and I know that you all have been asking for more context for quite some time, I want to speak a bit about how we're changing the way that we're approaching investments here because it's not just about how we're allocating, it's about the way we're making decisions. So we spent the last year allocating our capital with, what I'll call, surgical precision, a practice that we're going to continue doing.

And I've changed three components surrounding making investments here. I've changed the actual investment process, I've changed the criteria for investments, and I've changed the post-close management of made investments. And now high on our list on our capital allocation is growth in global capital markets and advisory on whole. And that's going to come in the form of adding to our talent pool and our systems with an eye to what the future holds for the industry, not what the past represents.

Second, in capital allocation, we're going to be making, as you've seen us make, the right long-term choices for our Services business to ensure continued growth. And we're not going to be patching things for Band-Aid to fix them. So I'm talking about some basic blocking and tackling here: labor management systems, instilling great operating practices, cross-pollinating best practices across Services business. And what you can see is that employing this very rigorous approach, the implications were very positive for our free cash flow already.

And the third area, which is what's been the focus of this year, which you know well, is reducing leverage. And frankly, I think we hit it out of the park, starting that virtuous cycle of rightsizing our leverage and, as importantly, reducing that cost. We were priced 3x this year. And the great thing about having this as a target of our capital is that every time we execute here, you accomplish your goal with 100% certainty, and you know exactly what the financial impact is going to be. But in no case do we foresee increasing our leverage as we're growing.

[Operator]

[Operator Instructions] The next question is from Alex Kramm with UBS.

[Alex Kramm, analyst]

Maybe you just touched upon this a little bit, but you made a comment earlier around on the Services side also being more focused on the margin, if I heard you correctly. So can you just talk about what that entails? Is it gaining more scale? Is it maybe a little bit more focused on pricing? Is it maybe a change in competitive dynamic? Where do you think you can get margin upside in that business? And how quickly do you think you can achieve that?

[Neil Johnston, executive]

Yes, sure, Alex. It's a great question. We've been very focused on that over the past 6 months, particularly in EMEA, where we had a design and build business, which is essentially where we have a lot of fixed price contracts. We've looked at that business and we've said, if we're not making money, we shouldn't be doing the work. And so in EMEA, you have seen Services down, but I'll tell you the EBITDA related to that revenue has actually been up. That work is essentially complete. So you'll see growth starting to happen in Europe, but that was the one area.

And then within the U.S. in a number of our Services businesses, we've looked at our contracts, and we've said profitability on those contracts is really critical. Most of the work is now done. We feel very pleased with the work we've done, and we're now starting to once again really focus on the top line, and that will lead to more accretive growth as we go forward.

[Alex Kramm, analyst]

Okay. Great. And then just maybe coming back to capital allocation. I think in your prepared remarks, you mentioned M&A only in the context of the Services business, small tuck-ins, I think, if I remembered you correctly, Michelle. But like you just also talked about the Capital markets advisory business. So is that also an area for M&A? Or how do you think about M&A generally in particular, as you just said, leverage probably stay at these levels?

[Michelle MacKay, executive]

Yes. The door is always open for M&A. It could be in advisory or services. But I think in particular, with regard to advisory for us right now, we are doing a lot of investing in the data and analytics in the Capital markets business in particular. And we're also on the hunt for new talent in advisory as well.

[Operator]

The next question is from Peter Abramowitz with Jefferies.

[Peter Abramowitz, analyst]

I think in Neil's comments, he mentioned just some delays in things on the project management side, which I know tends to be a little bit sensitive to the macro and kind of confidence from customers there. So I just want to ask, is there anything thematic that we should take away in what's been causing customers to delay those projects and how to think about when that might ease?

[Neil Johnston, executive]

Yes, Peter, there's nothing really thematic there. We have just seen, particularly in the office space, some delays in build-outs. It really is essentially, we believe, just a function of sort of a more subdued market. We feel like the tide is turning there, and we are focused in that area, but we've just seen some projects that have been canceled that have put a bit of a dampener on that business. We feel confident going forward, and we're starting to see those pipelines build and projects get executed. But there's nothing thematic. It really is just a function of the space we're in and some of the projects we are working on.

[Peter Abramowitz, analyst]

Okay. That's helpful. And then I think, Michelle, the term you've used is sort of a waterfall function in terms of the Capital markets recovery. So you already would seem to be indicating a significant acceleration if you're expecting 20% in the fourth quarter. So I guess, should we expect potentially further acceleration as we get into 2025? I know one of your peers mentioned a week or 2 ago that they're sort of thinking about it as a gradual recovery. So just curious in that context how you are thinking about 2025 from a Capital markets perspective as you sort of build out your budget and think about the year ahead?

[Michelle MacKay, executive]

Yes. I mean we've always talked about it as a gradual recovery. I've spoken quite often about how we invest in things over the long term, and we expect a long-term recovery. So our base case as it relates to Capital markets assumes the Fed is going to continue to cut rates by 25 basis points in November and December, followed by gradual rate reductions until they bring that rate back down to around the 3% range toward the end of 2025. We also believe the 10-year yield is going to hover in this 4% to 4.5% range for the foreseeable future, putting a more normalized interest rate curve into place, which is all positive for CRE. But when you think about that, we're talking about that process happening over the next year.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Michelle MacKay for any closing remarks.

[Michelle MacKay, executive]

Thank you, everyone, for participating in our call today, and we look forward to speaking with you next quarter.

[Operator]

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