Cushman & Wakefield plc

Welcome to Cushman and Wakefield's second quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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. If you would like to withdraw your question, press the pound key. It is now my pleasure to introduce Lynn Texter, Head of Investor Relations and Global Controller of Cushman & Wakefield. Mr. Texter, you may begin your conference.

Thank you, and welcome again to Cushman & Wakefield's second quarter 2020 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 labeled Forward-Looking Statements. Today's presentation contains forward-looking statements based on our current forecast and estimates of future events. These statements should be considered estimates only, and actual results may differ materially. 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 and definitions of non-GAAP financial measures are found within the tables of our earnings release and appendix of today's presentation. Please note that throughout the presentation, Comparison and growth rates are to comparable periods of 2019 and are in local currency. For those of you following along with our presentation, we will begin on page five. And with that, I'd like to turn the call over to our Executive Chairman and CEO, Brett White. Brett?

Thanks, Len, and thanks, everyone, for joining our call today. Before I start with a brief review of our second quarter performance, including some color by region and service line, I wanted to let you know that we have a slight revision to our agenda today. I have invited Kevin Thorpe, our chief economist, to join us today to provide some commentary on COVID-19's macro impact. Following Kevin's comments, I'll add a few final thoughts on our positioning and outlook, and then turn the call over to Duncan to detail our financial results for the quarter. Before we dive in, I would like to extend a heartfelt thank you to our team of Cushman & Wakefield professionals around the world. It goes without saying that these are unprecedented times and our employees' perseverance, creativity, and service to our clients continues to go above and beyond. From those who have continued to support frontline operations through the heart of the pandemic, to those delivering new and unprecedented solutions to our clients, I continue to be extremely proud of how our people have risen to the occasion when it matters most. So with that, let's begin. As you saw from our press release, Cushman & Wakefield reported second quarter fee revenue of $1.2 billion, which represents a 24% year-over-year decline as a result of the COVID-19 pandemic's economic impact. I'll touch on these themes more in a minute. While the global operating environment remains very uncertain, fee revenue for the quarter was better than our expectations. In the face of these challenges, we were pleased to report second quarter adjusted EBITDA of $119 million, which represents a reduction of $56 million from 2019. As you may recall from our last earnings call, we are modeling full year 2020 decremental margins in the mid-20% range, meaning the reduction in EBITDA divided by the reduction in revenue. In the second quarter, this decremental was 14%. This good performance in the second quarter was principally driven by decisive cost management actions taken prior to the COVID-19 pandemic, as well as tight cost management of discretionary items and other variable cost savings. In the second quarter, we delivered more than $75 million of cost savings, and we are on track to deliver annualized cost savings of about $400 million by the end of 2020. As you know, these cost decisions are never easy, but we firmly believe they were the right ones for the business and pose no material risk to future growth. Beyond our actions to optimize profitability, we also acted to reinforce our balance sheet and expand our liquidity. In May, we issued $650 million of senior secured notes, which mature in 2028. Despite our strong liquidity position before the debt offering, we took the opportunity to raise additional capital to ensure our financial flexibility and to take advantage of infill M&A opportunities that may arise during the coming quarters. As many of you know, in this industry, Differentiated real estate service platforms do not tend to trade hands often. In times of stress, the market for those businesses can provide generational opportunities, and Cushman & Wakefield is well positioned to take advantage of these should they arise. At the end of the second quarter, we had $1.9 billion in available liquidity. Before I speak to our service lines and regions, Let's put this current environment in context. I think most of us would agree that the impact of COVID-19 is unique and certainly different from previous recessions, such as the great financial crisis. However, while the shape of the recovery may differ from the GFC, in the second quarter, the initial impact of COVID-19 presented similar behavior in our industry, especially across our leasing and capital markets brokerage businesses. With that said, let me begin with the performance of our leasing business over the second quarter. Leasing fee revenue was down 45%, which was consistent with our expectations based on what we saw in March and April. As I said, this dramatic pause in client activity reflects similar behavior to what we have seen in prior recessions and tends to be a reflection of deferred decision-making. It is too early to know what the ultimate decline for in demand will be, and let me explain a bit more. Historically, in the early stages of most downturns, almost all occupiers facing a leasing renewal decision in a market shock do one of two things. They either delay that decision as long as they can, or they try to agree with the building owner to renew on a short-term basis. I mention this because roughly 75 percent of leasing activity represents existing tenants with expiring leases. And, based on our experience, there are typically short-term impacts on the pacing of those revenue-driving decisions in the early days of a crisis environment. In our capital markets, service line fee revenue was down 52%. In terms of capital markets observations, I'll offer two points. First, we would emphasize that what we are seeing today is much different than what we saw in the great financial crisis where debt markets froze because of a systemic credit crunch. In the current environment, debt markets remain relatively healthy and open, both because of healthy balance sheets pre-COVID and because of the dramatic influx of liquidity from central banks around the world. Second, regarding property type and risk tolerance. If you can imagine, there is a wide range of views on risk between an industrial warehouse that is facilitating e-commerce and a hotel or enclosed mall. In general, we believe the bid-ask spread for those riskier assets will remain wider and cap rates may move higher as a result of COVID-19's impact. For industrial and multifamily assets that make up most of our capital market service lines, We believe the bid-ask spread has more potential to revert and narrow as demand for long-term contractual yield with solid credit remains high in a world with low interest rates. Finally, I'll address our PMFM service lines, where we are pleased to see the stability we expect in these contractual fee-based revenue streams. As a reminder, This revenue stream represents about half of total portfolio annually. Throughout the pandemic, our teams in these businesses have been directly supporting our clients from keeping essential buildings open to reconfiguring offices and retail outlets for social distancing and providing enhanced cleaning and specific facility services to ensure buildings are safe for their tenants. In addition, our global occupier services business continue to win new assignments and renew existing client engagements for outsourcing services as large occupiers continue to focus on operational efficiency through down cycles. With that, let me now turn the call over to our Chief Economist, Kevin Thorpe, to give an update on how COVID-19 may shape the commercial real estate market. Kevin?