Q3 2023 Cushman & Wakefield PLC Earnings Call
Participants
Megan McGrath; SVP of IR; Cushman & Wakefield plc
Michelle Marie MacKay; CEO & Director; Cushman & Wakefield plc
Neil O. Johnston; Principal Accounting Officer, Executive VP & CFO; Cushman & Wakefield plc
Alexander Kramm; Executive Director and Equity Research Analyst of Exchanges, Ebrokers; UBS Investment Bank, Research Division
Anthony Paolone; Senior Analyst; JPMorgan Chase & Co, Research Division
Michael Anderson Griffin; Research Analyst; Citigroup Inc., Research Division
Patrick James McIlwee; Analyst; William Blair & Company L.L.C., Research Division
Patrick Joseph O'Shaughnessy; MD; Raymond James & Associates, Inc., Research Division
Ronald Kamdem; Equity Analyst; Morgan Stanley, Research Division
Presentation
Operator
Welcome to the Cushman & Wakefield Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
It is now my pleasure to introduce Megan McGrath, Head of Investor Relations for Cushman & Wakefield. Ms. McGrath, you may begin the conference.
Megan McGrath
Thank you, and welcome to Cushman & Wakefield's Third Quarter 2023 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 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. 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 2022 and in local currency unless otherwise stated.
And with that, I'd like to turn the call over to our CEO, Michelle MacKay.
Michelle Marie MacKay
Thank you, Megan, and thank you, everyone, for joining us this afternoon. I'm excited to kick off my second earnings call as CEO.
Before we get into the numbers, I've often been asked what differentiates me as a leader. And the answer is simple: I have a bias to action. And you can see that in what we've accomplished during the third quarter.
We made significant progress transforming our capital stack as we refinanced $1.4 billion of our 2025 term loan. This initial move has pushed out our maturities and will reduce the company's leverage by approximately $200 million in 2025. There was strong interest in the offering, it was well oversubscribed with more than 100 lenders in our term loan and more than 125 lenders in our bond. Additionally, we are ahead of schedule on our $130 million cost-out target for this year. The strong execution contributed to the sequential increase in our Q3 adjusted EBITDA margin of 9.4%. Our Q3 adjusted EBITDA performance of $150 million outpaced our Q2 performance despite softening market conditions as we continue to make choices that are in the company's long-term interest regardless of the macro environment.
It's true, uncertainties remain, and we saw the transaction markets take another pause in mid-August when rates moved higher. But even as transactional markets were idle during the quarter, we were not. We stayed focused, taking the deliberate actions I just discussed to improve our balance sheet and reduce our cost structure. What's really clear is that we have the right people, processes and capabilities to deliver for our clients, employees and investors. We've done the things that we need to do to stabilize the business, which puts us in the seat to make prudent and disciplined investments to ensure that we can capitalize on opportunities as they arise for the future.
Now let me share some more detail on where we are in our strategic review and, more importantly, our go-forward strategy. As I previewed on our last earnings call, over the past several months, we have completed a very thorough assessment of our business segments, including detailed financial and capital allocation reviews, rigorous scenario planning and long-term secular and industry analysis. These activities were part of a strategic road map we have created, and I'll share a bit more of that road map with you today.
The debt financing, cost-out efforts and strategic reviews that we executed on during the third quarter comprised of the first phase of our strategic road map: strengthening our core. I feel very good about what we've accomplished in a very short period of time, enabling us to move to the next stage: creating flexibility and optionality. This means putting our company in the best possible position, both operationally and from a balance sheet perspective, to make investments at the right time in the cycle.
To this end, we are focused on reducing our absolute level of leverage. As I noted earlier, we announced our intention to pay down the remaining balance of the term loan of $193 million, and we are developing a plan for further incremental debt reduction over the next several years. At the same time, we will also invest in compelling organic growth opportunities in both services and brokerage. As part of this plan, we remain committed to hiring and retaining with the ability to flex our spending, as appropriate. This will help ensure we're properly staffed, both now and as the markets recover, so that we capitalize on future growth opportunities. We expect to achieve these balance sheet and investment goals by improving our internally generated free cash flow, which Neil will expand on in a moment, and by identifying and monetizing small noncore assets.
We believe that this sharpened focus on the optimal balance between reducing debt and accelerating growth will be a long-term driver for shareholder value.
The final stage in our road map is all about sustainable long-term growth. We intend to achieve this by continuing to diversify our revenue and drive market share gains through a differentiated, agile and client-centric strategy. This means further partnering with our clients to help drive their business forward. We're not just hiring brokers but arming these brokers with proprietary data, analytics and insights.
One example of how we've recently levered the power of the Cushman platform is a mandate that we've won with a large global EV company by creating a cross-functional team from advisory services, technology and business development. We brought the client a bespoke solution informed by our unique expertise and perspective and the knowledge of a full spectrum of professionals. When we do that, I'll bet on our team against anyone else's.
We are also using our analytical capabilities to develop a view on where this company and our clients should be positioned 5 to 10 and even 20 years down the road. We are looking closely at mega trends in the built world, factors such as technology, urbanization, geopolitics, climate change and demographics, and layering these mega trends into distinct real estate subsectors across the stages of a typical real estate cycle. This helps us to understand where in each cycle each sector sits and identify segments that we believe will be disproportionately benefiting in terms of both growth and resilience sake.
This valuable proprietary analysis led by our independent research team is only one example of how we are positioning the company to be opportunistic while continuing to provide independent, data-driven and highly tailored advice and solutions for our clients.
It's clear to me that companies who will win in today's complex built world are those that can provide owners and occupiers expert data-driven advice and solutions as well as flawless execution. Our best-in-class analytics, and the strength of our newly integrated team, positions us not only to uniquely meet that need but also to gain share in a highly fragmented market.
As you can see, over the past several months, we have made significant strides in fine-tuning and beginning to execute on our plan. We are pushing hard to create a more agile, resilient and efficient Cushman & Wakefield that anticipates market trends and captures first-mover advantage where and when it really matters. We will share more details each quarter as we pursue these goals. I view this process as an ongoing evolution of the company as we solidify our position as a premier global adviser in the built world.
And as I finish, I'd like to thank all of our employees for their continued hard work as we navigate through this uncertain operational environment. You impress me every day with your drive and dedication to go the extra mile for our clients.
And now I'd like to hand the call over to Neil for a review of our third quarter financial results.
Neil O. Johnston
Thank you, Michelle, and good afternoon, everyone.
For the third quarter, we reported a sequential increase in both adjusted EBITDA and adjusted EBITDA margin despite a sequential decline in revenue. This demonstrates our commitment to enhancing profitability through our continued focus on driving cost efficiencies in our business. During the quarter, we also made significant progress on improving the strength and flexibility of our balance sheet and saw improvement in free cash flow with enhanced working capital efficiency.
Moving on to the details of the quarter. On the top line, while transactional markets remain challenged, we saw an improvement in year-over-year brokerage trends as we began to lap the difficult market conditions, which began in late summer 2022.
Third quarter fee revenue of $1.6 billion declined 11% versus the prior year with capital markets revenue down 33%, leasing revenue down 16% and PM/FM revenue down 1%. We mentioned on our first quarter earnings call that due to a change in the gross contract reimbursables at one of our facility services contracts, our PM/FM fee revenue would be reduced by roughly $90 million on an annualized basis with no impact on total revenue or adjusted EBITDA. Excluding the impact of this change, PM/FM revenue was up roughly 2% in the quarter.
Valuation and other declined 18% in the third quarter as the slowdown in transactions continue to result in lower valuation activity.
Adjusted EBITDA for the third quarter of $150 million was down 27% versus prior year, and our third quarter adjusted EBITDA margin was 9.4%.
During the quarter, we continued to benefit from our previously announced cost savings programs. We have realized $98 million of gross savings year-to-date and expect to end the year slightly ahead of our previously communicated $130 million target. We believe we've taken the appropriate level of cost-cutting actions to rightsize the business for the current environment and the near-term recovery period. I'm pleased with our team's execution on these actions, and we will continually pursue ways to operate more efficiently and profitably regardless of the operating landscape.
Adjusted earnings per share for the quarter was $0.21, a decrease of $0.22 versus prior year.
Turning to our segments for the quarter. In the Americas, we saw a 26% year-over-year decline in brokerage revenues and a 1% decline in PM/FM. Excluding a contract change, PM/FM revenues in the Americas grew 2.5%. The declines in brokerage were across most asset types, principally due to the higher interest rate environment and macroeconomic headwinds.
EMEA experienced a 14% year-over-year decline in brokerage revenues. Leasing revenue was down 5%, but year-over-year trends improved sequentially as our teams were able to successfully execute several large deals during the quarter. Capital markets revenue remained under pressure, down 32%, and EMEA PM/FM revenue was up 4%.
Our APAC region reported a solid quarter with brokerage revenue up 15% year-over-year as we experienced growth in several countries, including Australia, India and Japan. Our PM/FM business at APAC was down 2% primarily due to lower project management activity.
Adjusted EBITDA declined in the Americas and EMEA principally driven by the lower brokerage activity, while EBITDA in APAC grew 44% driven by the improvements in capital markets.
As previously mentioned, we saw a significant improvement in free cash flow. Free cash flow for the third quarter was $174 million versus $38 million in the third quarter of 2022. On a trailing 12-month basis, we generated $152 million of free cash flow compared with $40 million a year ago.
During the third quarter, we refinanced the majority of the remaining $1.6 billion of our Term Loan B due 2025 with a combination of $1 billion of new Term Loan B due 2030 and $400 million of secured notes due 2031. We expect to repay the approximately $200 million of remaining Term Loan B due 2025 with cash on hand. This moves our nearest significant funded debt maturity to 2028. The refinancing did not meaningfully increase our overall borrowing cost and our debt remains approximately 93% fixed.
Overall, our financial position remains strong with $1.7 billion of liquidity, consisting of cash on hand of $588 million and availability on our revolving credit facility of $1.1 billion. We had no outstanding borrowings on our revolver and net leverage was 4.5x at the end of the third quarter.
Finally, moving on to our outlook. For the full year 2023, we anticipate our PM/FM revenues to grow in the low single digits. We expect brokerage revenues for the full year 2023 to be down 20% to 25% compared to our previous guidance of down 20%. Due to this reduced expectations for brokerage revenues, we now expect to be near the low end of our previous adjusted EBITDA margin guidance range of 9% to 10% for the full year 2023. Looking ahead into next year, given the recent move higher in interest rates and continued uncertainty around Fed actions, we expect that a market recovery in brokerage may be delayed until the second half of 2024.
Despite current market conditions, we believe the work we've done throughout 2023 on driving free cash flow, achieving cost efficiencies and strengthening our balance sheet, positions us extremely well financially navigate the upcoming year.
That concludes the financial review, and now I'll turn the call back to Michelle.
Michelle Marie MacKay
Thanks, Neil. I'm proud of what we've accomplished during the third quarter and the work we are doing to position the company for the future. We will continue to control what's within our reach with a focus on creating flexibility and optionality in this next stage. I am confident that our go-forward strategy will position the company for long-term sustainable growth. And I look forward to sharing our progress with you each quarter.
And now I'll turn the call over to the operator to take your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Our first question today is from Anthony Paolone with JPMorgan.
Anthony Paolone
I guess my first question relates to the plan you outlined to find incremental cash to reduce debt over the next few years. I'm wondering if you could expand on that a bit and just maybe put some brackets around order of magnitude and what sort of assets do you see CWK having right now that could be monetized. Like, are these businesses? Are there investments on the balance sheet that could be sold? Just wondering if you can give a little more detail on all that.
Michelle Marie MacKay
Sure. I think the best way to think about our long-term target for leverage is between the 2% to 3% range. And we plan to get there through a combination of debt paydown and EBITDA growth. Our goal is to demonstrate a balance between the two and the way that we're allocating capital. So we want to both be reducing debt and investing in growth, right? This is not an either/or conversation. And I think what's important for everybody to understand is that we're committed to reducing our debt level over time as we grow the business because we believe this is the optimum path to generating strong shareholder returns.
In terms of monetization, I think before I talk about that, I just want to speak to the fact that monetization can take place in a variety of forms. It's not always an all-out sale of a business or an entity. And what I can say about that is, because of the way the company was built through a series of mergers and acquisitions, there are components that were brought into the entity that are not necessarily strategic or core. And we're not going to outline or speak what they are or to them directly today, but I can tell you that they are small in size and they wouldn't necessarily meet the long-term growth profile of the company.
Anthony Paolone
Okay. And then just my second question, Neil, I think you mentioned coming in at or a little bit above $130 million cost-saving target for '23, and you felt like that is kind of where you'd end up and felt good about that. But just wondering, if the business stays challenged into '24 or maybe goes longer before we see much recovery, do you have other levers you could pull there? Are there other cost saves that could be contemplated?
Neil O. Johnston
Tony, at this point, we feel like the $130 million that we're targeting is the appropriate level to not only ensure our margins in this year 2023 but also through 2024 in terms of what we are forecasting, and that contemplates a marked recession. We are always focused on efficiencies. So there are always additional levers that we can pull. We always are improving the operating ability of the business. I think the easiest way to think about it is, in that $130 million of savings, about 20% are temporary costs which we took out of the business in 2023, things like travel, marketing, those types of costs. If we did see the market continue to run at the same sort of levels all the way through to next year, then obviously, we would hold back on allowing any of those costs to come back into the business. And then that cost savings on a permanent basis would increase from about $130 million to about $160 million for the year.
Operator
The next question is from Alex Kramm with UBS.
Alexander Kramm
Maybe starting first on the PM/FM business, maybe it's a little nitty-gritty here. I know you had the contract change, but if I look at your updated outlook, Neil, I don't think you mentioned it, but I think the low single-digit expectation is a downgrade to your prior expectation from, I think, low to mid. So just curious what else has changed in that business. Is churn increasing? Are the sales cycles just longer? So maybe just talk about that business because it seems like you lowered expectations there slightly.
Michelle Marie MacKay
Yes. This is Michelle. I'm going to let Neil talk you through some of the numbers, and then I'll address our services strategy.
Neil O. Johnston
Sure. Alex, I think the best way to think about our services business is really considering three different things. As you say, the first one is the fact that we had that contract change. That takes the growth from negative 1% to a positive 2%, which is in line with our low to mid but arguably at low end. The second thing is, in the prior year, we saw very strong services growth. In fact, that growth was double digit all the way through the first 3 quarters of the year. So as we came into this year, we really would have slightly tougher comps, and you're seeing that in the numbers that we showed in the third quarter. And then finally, in Asia Pacific, it really was our project management business which was slightly lower than expected. That business does tend to be fairly lumpy. We did see very strong activity a year ago. And so if one looks on a year-to-date basis, APAC services was actually up around 6%. And so that sort of smooths some of the lumpiness.
Michelle Marie MacKay
And I want to make it clear that while there's a few unique items this quarter impacting the results, we aren't satisfied with the low level of organic growth that we reported in our services business. And this business is a big priority for us and a key area to invest in. So there's a lot of opportunity for us to grow our services businesses organically, and we will be focusing on driving accelerated growth in this business specifically.
Alexander Kramm
All right. Fair enough. And then maybe secondarily, I don't know if this is a follow-up to an earlier question on 2024, but obviously, you are looking for a second half recovery next year. But if we stay in this environment here, and I'm not so much focused on expenses but more for the growth outlook, do you still think there's growth in the business from these kind of levels? I mean, again, you have a large portion of kind of like recurring businesses and then I think, again, on the sales side, capital markets side, we're pretty soft already; hard to see it go a lot lower. And then on the leasing side, I think renewals are actually supposed to be down next year, but maybe you're still getting market share. So maybe a little bit of an early question about 2024, but in an unchanged environment, do you actually think you can grow from here? Or would there still be some headwinds here?
Michelle Marie MacKay
Okay. So there's a couple of things to unpack. So let's just start with leasing, and we'll give you our experience here. So this year, we've got a couple of large leases this quarter for occupiers, but we're also seeing them holding off on decision-making. How you can translate that is they're going to have to make a decision eventually. So occupiers have taken a defensive posture this year because of higher cost of capital, right? And they've been very careful with expenditures, which obviously impacts their decision-making. But it's really unusual for leasing to dip ahead of a downturn. Typically, leasing moves in line with GDP and job growth, that's what you're getting at. But what we think is happening is perhaps some of the weakness that would have been in 2024 is actually getting pulled forward this year. So we expect leasing volume to hold through next year and hopefully improve over time. But as you've said, if that were not to be the case, we're well prepared, as Neil has spoken to, in both our cost structure and the fact that we have a services business.
When you talk about capital markets, predicting the timing of cap mark, the rebound is really difficult, but we know it's going to come. And if you look behind on the surface, the preconditions that will lead to the recovery are starting to form in here. Inflation is coming in, right? We've got the Fed this week. We think that there's going to be a pause in there. We're starting to see some of the shoots around stressed and distressed asset trading, valuations and other indicators in that sector.
Operator
The next question is from Michael Griffin with Citi.
Michael Anderson Griffin
Maybe just piggybacking off of your previous response there, Michelle, on the PM/FM business. You talked about organic growth initiatives you're going to undertake. Is there any chance you can quantify some of those initiatives for us? And any color around that would be helpful.
Michelle Marie MacKay
Yes. I mean I'm not going to quantify it for you today, but I will tell you that you're always going to see a toggle between us deleveraging and investing for growth, right? We're not just pushing on one pedal. We're going to push on both pedals at the same time. Services, the duration, the nature of that particular business for us, is really valuable in relationship to our other business. And when you think of it in pockets, think about GOS, think about asset and think about CW Services, and those are going to be key areas that we target for investment.
Michael Anderson Griffin
Got you. That's helpful. And then maybe just on the capital markets business. For the deals that are trading, I mean, can you give us a sense of what's out there, what buyers are expecting, if anything, where buyers and sellers are? And anything there would be helpful.
Michelle Marie MacKay
Yes. I mean I think there's a lot of friction in the surface still with regard to clearing levels and trading. And you clearly have movement of cash flow flight to quality in the assets as well. 60% to 65% of the deals we actually see getting done are still in industrial and multifamily. And those are the two sectors that buyers, sellers and lenders have the most confidence in. There's strong buildup in capital for opportunistic, right? There's a lot of dry powder out there, and investors are also getting anxious to deploy it. So we don't think it's a matter of is it going to happen, right? It's going to happen, but we probably have a couple more months before we really start to see volume in terms of clearing in the stress and distressed markets.
Operator
The next question is from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem
Yes, just two quick ones. So one on the capital markets recovery, I think a lot of the peers have talked about sort of a second half '24, which obviously is probably a year later than we all expected. How is that being determined? Is it just sort of, hey, the macro is going to be better, so therefore, people have to transact? Or is there something more that we should be looking for, for those deals to unwind? I'm just trying to figure out like how are we pinning down the days for a recovery? Or is it just based on the macro?
Michelle Marie MacKay
Okay. Yes. I mean I think rate stabilization is the key, right? That leads to cap rate stabilization, that leads to stronger transaction activity. So I think when we're all taking a point of view that leans toward the second half of next year, a lot of it has to do with what the curve looks like, right? You want to have a normalized curve. The real estate markets have functioned for 50 years, right, when the 10-year was above 5% and functioned well. So we're waiting for the timing to happen so that we have a normalized curve and people can start to transact around that versus waiting for when is the Fed going to come out next.
Ronald Kamdem
Got it. And then my next question, just going back to the cash flow statement, it looks like there was a lot of cash that flowed through this quarter. Just any sort of onetimer and, as we're thinking about the back half of the year, any other sort of one-off that we should think about as we're translating EBITDA to cash flow?
Neil O. Johnston
No, Ron. Generally, what we're seeing is, with the lower earnings, we're seeing the lower earnings being offset by the release of working capital. Our teams in the field have done a phenomenal job really focused on working capital. And so we are seeing the benefits of that. We're also seeing lower cash taxes as a result of the lower earnings. So those are sort of the items that are driving the free cash flow but nothing specific and onetime. We do think cash flow this year is going to be very strong.
Operator
(Operator Instructions) The next question is from Stephen Sheldon with William Blair.
Patrick James McIlwee
Neil, Michelle, you've got Pat McIlwee on from William Blair. My first question is, with U.S. office vacancies near 20% now, how much do occupancy trends in that space impact the demand you see for outsourcing services in your PM/FM business? And has that been or would you expect that to begin weighing more on growth in the business at all?
Michelle Marie MacKay
I mean let me just come back to you with that question. So do you mean that the vacancy in office buildings impacting our services business?
Patrick James McIlwee
Correct. Yes, demand for the outsourcing service.
Michelle Marie MacKay
Yes. I think the way that we're thinking about it now is that we think we're nearing the end of the remote work impact. So we've seen a lot of it happen already, right? And something to keep in mind is that the average lease in the U.S. is about 6 or 7 years long, and most businesses have already made their decisions on space. So either they signed a new lease likely for less space or they're still in their existing space or they listed their space to sublease. So a lot of this has already played through the system. We did have some impact over the course of 2023 in the office portfolios that we manage. But I wouldn't anticipate a material change in that over 2024.
Patrick James McIlwee
Understood. And then just as a follow-up, a little bit further on the cost-saving initiatives. So we've heard peers say that they're looking a bit more producer head count given the longer expected downturn. And I'm just curious if or how your strategy has changed on that front in terms of maintaining capacity for recovery versus supporting margins until we do see that recovery.
Neil O. Johnston
I think we've always been very focused on the return of any investment we're making in producers. And so I think we've been very prudent with our capital allocation. We feel good about the investment we're making in growing our producer in our recruiting and our retention. And I don't see that changing as we move forward either in either direction. So we feel very good about our production capacity and how that sets us up for any potential recovery in 2024.
Michelle Marie MacKay
Yes. And just to give you a little bit of our philosophy around it, we look at talent much like we look at our portfolio of businesses, right? And like in any business, we question is that team or individual focused on what you consider core strategy, an area that we're really focused on? Do the economics of that makes sense, right? What do we want in new talent that we're bringing in? And so we're always paring and pruning our talent so that we have advisers in the shop that really drive the future of the company. So I think that when you think about it, movement for us, meaning people leaving and people coming in, is going to be a normal course of business at Cushman.
Operator
Next question is from Patrick O'Shaughnessy with Raymond James.
Patrick Joseph O'Shaughnessy
So what would the implications of a potential WeWork bankruptcy be on your strategic relationship with WeWork? Are there any tangible risks to any revenue streams?
Neil O. Johnston
There are not. The investment as a whole -- we've already taken the mark-to-market there. And then in terms of our relationship with them, we do, do a lot of work for them, but it's not material to the overall company. So I would anticipate that if there was a bankruptcy, many of those spaces still need to get serviced, still need to get managed or still need to get changed. It's an essential service. So we don't see it as a material impact to the company.
Patrick Joseph O'Shaughnessy
Great. And then can we get your updated thoughts on Greystone? In particular, do you consider Graystone to be a core asset and a core part of your strategy? Or would they maybe fit into the noncore bucket?
Neil O. Johnston
We view our investment in Graystone over the long term. We remain very constructive on the multifamily platform, and we believe the underlying long-term fundamentals in that business are strong. While we did see a decline in Greystone primarily due to a reduction in lending volumes, we're actually quite pleased in the quarter on a relative basis in terms of our performance. We took share in all 3 of the agencies. We remain the #1 FHA partner or lender. We're #2 with Fannie, #5 with Freddie. And so we continue to take share and view that as very strategic as we move forward.
Operator
This concludes our question-and-answer session, and the conference has also now concluded. Thank you for participating in today's presentation. You may now disconnect.
