Chandni Luthra:

Good morning, everyone, and welcome to CBRE's Second Quarter 2024 Earnings Conference Call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials. Before we kick off today's call, I want to say how excited I am to have joined CBRE last month. I know many of you will already and others I'm looking forward to getting to know better in the weeks and months ahead. Now I'll remind you that today's presentation contains forward-looking statements, including without limitation, concerning expected benefits and synergies from the combination of Turner and Townsend and CBRE project management and other M&A transactions, our business outlook, our business plan and capital allocation strategy and our earnings and cash flow outlook. Forward-looking statements are predictions, projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release in our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I am joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino:

Thanks, Bob, and hello, everyone. I'll begin by highlighting the strong performance of our resilient businesses and an improvement in transaction activity. As a reminder, our resilient businesses include facilities management, project management, property management, loan servicing, valuations and investment management fees. Together, these businesses increased net revenue by 14%, reflecting double-digit organic growth and a strong contribution from M&A. Notably, our GWS and Advisory segments together delivered double-digit net revenue growth for the first time in 18 months, with combined leasing and capital markets revenue increasing for the second consecutive quarter. Our REI segment has also seen an upturn in activity, contracting to sell multiple development assets at attractive valuations, which we expect to complete in the fourth quarter. Now please turn to Slide 6 for a review of the advisory segment. Advisory net revenue rose 9%, with growth in every line of business, except property sales. Globally, leasing revenue exceeded our expectations, led by 13% growth in the U.S., including a nearly 30% jump in office revenue. New York, a bellwether for CBRE was a key driver of the increase. Retail, albeit relatively small, also exhibited strength while industrial activity declined. Leasing momentum has continued in July, supported by a pickup in demand in many large U.S. office markets. Turning to Global Property sales. Revenue began to stabilize, declining only 2% on a local currency basis and 3% in U.S. dollar terms. A 4% decline in the U.S. was somewhat offset by growth in the U.K. where property values have largely reset. While APAC was down in dollar terms, sales revenue ticked up slightly in local currency. Our mortgage origination business produced very strong growth, supported by a 20% increase in origination fees. Loan origination growth was driven by debt funds, which are offering short-term refinancing to bridge the gap until interest rates decline. Advisory's net revenue from resilient businesses rose 11% in aggregate. And overall, advisory SOP rose 9% and net margins ticked up slightly compared with Q2 2023. Please turn to Slide 7 for a discussion of the GWS segment. The segment's net revenue rose 16%, above our expectations, and we are pleased that organic growth also improved by double digits. GWS delivered strong business wins with a healthy balance of new clients and expansions. In addition to robust sales conversion, our pipeline is up more than 6% from the end of 2023. And driven by technology and energy sectors. Product Management net revenue delivered double-digit growth. Bob will go deeper on Turner & Townsend, a business that we do not believe is fully appreciated later in the call. Turning to Facilities Management. Net revenue rose 18% and 11% on an organic basis. We committed nearly $300 million in facilities management M&A in the quarter. Most of the capital went to the Direct Line acquisition, which positions us to accelerate our growth in data center management, an estimated $30 billion market that is growing rapidly. We also acquired a small local facilities management business in Canada. Local Facilities Management started as a U.K.-focused business that had $630 million gross revenue in 2013. And is now a global business with $3.1 billion of gross revenue in 2023, a 17% compound annual growth rate. This business has significant headroom, especially in North America. GWS' net OP margin improved by 20 basis points from the first quarter to 10.1%, better than expected, reflecting our decisive cost actions. We expect to see year-over-year margin expansion in our full year results as those cost actions take effect. Please turn to Slide 8 as I discuss the REI results. Segment operating profit was slightly better than expected, although significantly lower than prior year, driven by the absence of meaningful development project sales. This is consistent with our plans going into the year, but we now believe we are approaching a period when we again generate significant profits from the sale of development assets. Investment Management operating profit was better than expected, largely due to higher co-investment returns. AUM is now at more than $142 billion. The $3.6 billion we've raised thus far this year was offset primarily by lower asset values as well as adverse FX movements. However, asset value declines have moderated, and we have seen evidence of valuation stabilizing in certain preferred asset classes in the U.S. and Europe. Investor sentiment continues to improve with increased appetite for both core and enhanced return strategies. Now I'll discuss cash flow and capital allocation on Slide 9. Free cash flow improved meaningfully to $220 million and conversion was nearly 90% for the quarter. We are increasing our free cash flow outlook for the year to slightly over $1 billion and now expect to be end the year with about 1 turn of net leverage even after deploying $1.3 billion of capital thus far in 2024 across M&A and co-investments. Our year-to-date 2024 capital deployment brings our 3-year total to approximately $4.8 billion, $3.7 billion in M&A and over $1 million in REI co-investments. M&A is integral to our strategy of enhancing our capabilities in parts of our business that are secularly favored or cyclically resilient. The acquisitions we executed in this quarter are clear examples of advancing this strategy. Our investments in development have accelerated and put us in a position to harvest as much as $750 million in profits over the next 4 years. Our combined in-process portfolio and pipeline now stands at nearly $32 billion. Over the last few years, when many developers were on the sidelines, our teams have taken advantage of this opportune time in the cycle to source industrial, multifamily and data center land sites in highly desirable locations. We anticipate strong growth and returns from M&A and co-investments and expect to continue making highly accretive investments supported by our strong balance sheet. Please turn to Slide 10 for a discussion of our outlook. As Bob mentioned, we are increasing our expectations for full year core EPS to the range of $4.70 to $4.90, driven by higher revenue in SOP in each segment. We anticipate a very strong fourth quarter, which should account for just over 45% of our full year EPS. Within advisory, we now expect mid- to high teens SOP growth driven by stronger-than-expected transaction activity. For GWS, we anticipate mid-teens net revenue growth and a full year net SOP margin that is better than the 11.3% we produced in 2023. Our improved outlook is driven by the facilities management acquisitions in Q2 and the effects of our cost actions. For REI, our improved SOP outlook is primarily due to the large development asset sales expected to be completed in Q4, which we believe portends an upturn in this business. Before I conclude, let me take a minute to update you on our longer-term outlook. We have increased confidence in achieving record EPS in 2025, assuming a continued supportive macroeconomic environment. A return to peak core EPS, just 2 years following our earnings trough reflects how well we've improved the resiliency of our business compared with prior downturns. We expect even stronger resiliency in the next cycle as a result of the moves we are making. There are several reasons for our increased confidence in our outlook. First, we expect continued double-digit growth across our resilient businesses, which are on track to contribute $1.8 billion of SOP for full year 2024, up from nearly $1.6 billion in 2023. Second, while it's difficult to predict the cadence of the recovery, we can achieve record earnings without an accelerated rebound in transaction activity. Finally, we expect additional strong growth from the capital deployment plans I described earlier. Taking all of this into account, we have great confidence in sustaining a double-digit long-term growth trajectory. With that, I'll hand the call back to Bob.

Operator:

[Operator Instructions] Our first question is from Ronald Kamdem with Morgan Stanley.

Emma Giamartino:

So Ronald, what you saw in Q2 is that we took a lot of cost actions in our margin within Q2 and at 10.1% was above what we are expecting and above what we achieved in Q1. And it's obviously not near the run rate that we expect to target. For the full year, we're expecting the overall margin to be above that 11.3% that we delivered last year. So you're going to see higher margins in the second half. And then going into next year, that run rate will be even higher than where we get to for the full year. But we're not going to get to the second half margins on a run rate basis.

Bob Sulentic:

Ronald, first of all, thanks for picking up coverage on us. We're thrilled to have Morgan Stanley following us. The first part of the answer to your question is very anecdotal. We had the quarter, we had in leasing and mortgage originations in the second quarter. And the positive activity has continued into the first part of the third quarter, and I'm going to pass it to Emma to let you talk -- let her talk a little bit more about that. But there are some other things that are giving us confidence. So for instance, we get insight from the fact that we do a lot of different things. We're not only are we an intermediary, but we're a principal. And in our development business now, we are seeing demand for projects that we didn't expect and it's going to happen in the fourth quarter of this year. That gives us confidence that other parts of the capital markets are acting that way. Obviously, there's a sentiment out there that there's going to be a couple of rate cuts or at least one rate cut this year. the bid-ask spreads are narrower than they were before, except maybe in office. Our investment sales brokers and mortgage brokers are more active and have stronger pipelines than they did before. Our work with office tenants, where we measure through all kinds of different mechanisms and surveys sentiment has gotten better. So we have this anecdotal evidence from the second quarter starting and then the third quarter. And then we have more technical evidence that causes us to think that we may well have gone through an inflection point on transactions that's going to impact leasing. It's going to impact sales. It's going to impact mortgage brokerage, and it's going to have a really nice impact in the fourth quarter on the profitability of our development business. Emma, you might want to add to that.

Operator:

Our next question is from Anthony Paolone with JPMorgan.

Bob Sulentic:

Tony, it's different. But there's a lot of synergy between what Turner & Townsend does and what we do, and it's 2-way synergy. They're -- they operate in 60 countries around the world, and they're more substantial in parts of the world than we are. We've been able to introduce them to our client base in a number of places very successfully. And I'm going to give you an anecdote, and I'm going to give you some numbers, one that's repetitive. Turner Townsend grew over Vince Clancy's tenure 13% for many, many years on a compounded basis, more than a decade. Since they've been part of us, they've grown at 20%. Anecdotally, and I mentioned earlier, where we benefit from having a whole bunch of different businesses that we undertake. Anecdotally, there are a couple of major corporate manufacturing plants that Trammell Crow Company and Turner & Townsend, are cooperating on to deliver the development services work and the program management work billion-plus dollar plant, we believe at Trammell Crow Company, and we believe that Turner & Townsend, and Vince and his team believe that those projects wouldn't have been landed by us, had we not had the ability for those 2 businesses to cooperate. So Turner & Townsend would be a great public company, make no mistake about it. There's a lot of enthusiasm for companies like them in the public markets today. They're very unique even relative to other large program and project management firms and large engineering firms. But they fit really, really nicely with us. And we think there's going to be a great story long term there. We've put Vince on our board because we think there's so much synergy between what he and his business do and what the rest of our company does. So I hope they're a very long-term part of CBRE.

Emma Giamartino:

Yes. Facilities management, we believe, has a low double-digit organic revenue growth trajectory for the very long term, and that's supported by 2 components. One, the enterprise side, which is where we manage large occupier clients globally, that business should grow at a high single-digit rate. And that's where you see most of our competitors play in that space. So where our facilities management business is different from our competitors is our local business. And that's, as you know, the regionally focused business that I talked about in my remarks that has grown in a 17% compound rate. over the past decade. And that business should grow at the low to mid-teens rate, which is bringing up and even higher over time, and we expect to do M&A within the local sector, so that on an organic basis, we are confident that we'll remain in the low double-digit range. And then M&A on top of that will get us higher.

Emma Giamartino:

So we increased guidance across all 3 segments. So I'll walk through all 3 of them. Within Advisory, as you'd expect, increase in transaction activity, and we're getting to mid- to high teens SOP growth. Within GWS, the increase is largely due to M&A. Our organic growth expectations are in line with what we expected going into the year. And we're getting to mid- to high teens SOP growth for the year within GWS as well. And then REI is probably about past of the contribution for the increase in guidance and those couple of very large development deals that we expect to monetize in the fourth quarter. And when you look at the second half, what you're seeing is accelerated growth across all segments. Advisory, you're going to see low double-digit revenue growth in the second half, but very strong SOP growth as we have very strong high incremental margins across our leasing and sales business. And then GWS, as we've talked about, we've expected very strong revenue growth in the second half as both M&A picks up in the second half and as the large contracts that we won earlier this year and late last year start to be onboarded. And again, we've done a lot of cross works. You're going to see higher than higher than our run rate margins within GWS in the second half as well.

Jade Rahmani:

On capital market side, could you characterize the tone and tenor from participants in the quarter. Property sales were still down year-on-year, but commercial mortgage surged. Could you please provide some color on what you're seeing?

Jade Rahmani:

On the sales side, are you seeing an uptick in acquisitions yet? Or is it still pretty subdued there most of deal flows on the debt side?

Jade Rahmani:

On the leasing side, many office tenants continue to shrink on average, somewhere around 10%, 12%. But activity was so substituted the past 2 years, you are seeing an uptick. Could you talk about that and also comment on retail?

Jade Rahmani:

And lastly, on the REI uptick, is that primarily driven by multifamily. I believe that's around 30% of the pipeline. Could you comment as to the percentage of gains. Are they going to be lower than historical due to the cost inflation we've seen as well as interest rates? Or do you think the demand for new products is outweighing that?

Jade Rahmani:

Yes. Sorry, I should have clarified. Within REI, the Trammell Crow business.

Jade Rahmani:

Can you say whether the increase in guidance or the uptick in REI in the fourth quarter is predominantly due to the data center sales. I have in my coverage team homebuilders, for example, sell land parcels, they intended for residential to data center developers and they've generated huge gains, but those really are not as sustainable as their regular business.

Bob Sulentic:

If I could, I may just add on to that. And Jade, to specifically address what you said and that $750 million does not depend on all kinds of good luck with industrial sites transitioning to be data center sites. That's an asset-by-asset review of our portfolio. For the purposes that we acquired it for unless we know today that it's going to move to another asset class and measuring where we think it will come out over time.

Michael Griffin:

Just want to go to capital deployment for my first question. Obviously, you guys have been so far this first half of the year, whether it's through M&A or buying back stock. I'm wondering if you can give us a sense of how you weigh kind of those opportunities against each other. Is there a time where your stock price might hit a certain dollar amount, you're like all right at the time to really get aggressive here and just kind of how you weigh those 2 factors against each other. Color there would be appreciated.

Michael Griffin:

Emma, can you give us a sense of kind of those hurdle rates you're underwriting for potential M&A opportunities?

Michael Griffin:

Great. That's helpful. And then my second question was just kind of on the leasing. I know you touched on it earlier, particularly for the office side. But -- are you seeing this greater demand coming from all office products broadly? Or is it just in kind of that [Tropin] Class A product. And then you called out New York as a relative bright spot, but I'm wondering if there are any other big markets either domestically or globally, that surprised you to the upside?

Operator:

Our next question is from Steve Sakwa with Evercore ISI.

Emma Giamartino:

In the quarter, it was minimal. We repurchased $50 million worth of shares at an average price off $87.

Bob Sulentic:

Steve, we have a philosophy about our business here that we want to drive this company in a way that we perform at a high level in everything we do. One of the things that we're doing in that regard is focusing more and more on getting rid of costs that don't contribute to the success of the company. Cost of every kind, technology projects that don't contribute, people that don't contribute office space that doesn't contribute. And the stuff that does contribute good office space, good technology, good people, we are aggressive buyers of those things to build our business. And what's happened is, and we have a transformation office that reports to analysts, so I ought to let Emma comment on that is we are aggressively looking for those things we can get rid of, and you saw that happen in the second quarter. But the stuff we need, we're aggressive buyers. We're aggressive buyers of land. We're aggressive buyers of talent. We brought on some spectacular talent in the last quarter. We have an aggressive technology investment program, but we are narrowing the things that we're investing in and being very careful. And Emma, if you want to add to that?

Operator:

Our next question is from Stephen Sheldon with William Blair.

Bob Sulentic:

Stephen, to answer that question, I want to back up and talk about how we think about M&A. And I think M&I would agree that there's more work we have to do on our side to get the market that invests in CBRE's shares to understand how we do M&A. First of all, we don't have a group of businesses and a group of leaders that sits there and waits for something to come up for sale at a good price. We are a very strategy-driven company. Each of our businesses has a strategy for how they want to grow. And that strategy is very attentive to, a, adding capabilities and b, adding capabilities in areas that we think will sustainably do well in the marketplace, either because they're cyclically resilient or they are secularly favored. There's no better example of that, obviously than Turner & Townsend. So if you look at our facilities management business, doing things that the marketplace wouldn't expect us to do because we've asked the leaders in the various sectors within facilities management, so manufacturing, financial technology, et cetera, to understand their business and the capabilities that they can be in that business that will differentiate it and make it attractive to our clients in the long run. They wouldn't go out in the marketplace seeking out those acquisitions. So the deals that you've heard us make in the last year, those -- we do not do those deals through auctions. None of those deals came to Turner & Townsend, wasn't done through an auction, J&J wasn't done through an auction. Direct Line wasn't done through an auction. The local FM business we bought in Canada, during the quarter wasn't done through an auction. Those were -- none of those were done through an auction. We went to the sellers of those businesses or the owners of those businesses and pursued them because we thought they were a good fit. We have ideas around our business. We have an increasingly well-developed corporate development team led by 14, 15-year Morgan Stanley veteran that then acts on those ideas to acquire them and we integrate them after that. That's our approach to M&A. And as a result, you should expect us to see -- you should expect to see us do more deals in the facilities management space and other spaces that you didn't expect because they aren't highly visible by others in the market.

Emma Giamartino:

Yes. We've seen a pickup activity -- inactivity. We are expecting a pickup in activity in enhanced return strategies, but we've also seen a pickup in the first half in core and core plus. And I think you're hearing that broadly across the market, which we think is a very positive indicator for the remainder of the year.

Peter Abramowitz:

I just wanted to ask about sort of the relative stabilization and resilience versus your expectation in the investment sales market. I guess could you just give more color on what you think is driving that? And could you comment and just give some more color on whether that's dry powder on the sidelines and how much kind of pent-up demand there is from the last couple of years a pretty depressed activity.

Peter Abramowitz:

Bob. I appreciate the color. And then I wanted to ask about specifically on the office leasing side. I guess just kind of looking at the algorithm between pricing and volume, obviously, volume is improving to start the first half of the year. Overall, I mean, are you still seeing pricing continuing to go up on those trophy assets? And then overall, in the broader market, if you zoom out to look at trophy as well as kind of Class A minus and then commodity below that, how is pricing trending? And how does that sort of affect your outlook for leasing revenues?

Emma Giamartino:

So on the office leasing side, and Bob is talking about locking in New York. For trophy assets, yes, especially in New York, those prices are increasing. But if you look broadly across our office leasing portfolio of transactions, pricing is pretty much stabilized, but there are very -- there's big differences in what's happening by asset type and by quality of assets and by market.

Bob Sulentic:

Thanks for joining us, everyone, and we'll talk to you again at the end of the third quarter.

Bradley Burke:

Good morning, everyone, and welcome to CBRE's First Quarter 2024 Earnings Conference Call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials.

We started 2024 by delivering core earnings that exceeded our expectations. This was driven in part by solid net revenue growth. However, several notable elements of our performance differed from our time going into the year. I'll touch on 3 of them:

leasing strength, property sales weakness and cost pressure.

Emma Giamartino:

Thanks, Bob. At a consolidated level, core EBITDA was in line with our expectations as slight outperformance in REI and lower-than-expected corporate costs offset margin underperformance in GWS. Advisory SOP performed as anticipated.

Anthony Paolone:

I guess first question relates to just the guidance at your midpoint and the comments here around 70% in the back half. I guess it implicitly means that 2Q goes down notably. And so I was wondering if you could just give a little bit more color on that, whether EBITDA also goes down sequentially or if that's an EPS matter? Anything there?

Anthony Paolone:

So even sequentially, though, does EBITDA kind of move down sequentially from 1Q to 2Q? Today just seems a little bit counter to the normal seasonality.

Anthony Paolone:

Okay. And should we think about just full year EBITDA margins still being up versus '23 at this point?

Anthony Paolone:

Okay. And then just last one. You mentioned a large development project because you saw the roughly $3 billion balance in Developments underway. But it sounds like that's a fee deals. Just wondering if you can give us a little bit more detail because it's a big increase, and I always looked at that as being something that could drive, promote and your share of gains, but it sounds like maybe there's also like fee projects in there as well where you may not participate. Just maybe some more details there.

Operator:

The next question is coming from Steve Sakwa of Evercore ISI.

Emma Giamartino:

Steve, what you saw in Q1 was related to J&J. We've always talked about we're balancing M&A and share repurchases, and our priority is to deploy capital towards M&A and strategic M&A. And so in Q1, we pulled back on repurchases as we were executing that transaction. We have started repurchasing shares in Q2 to a small extent. And for the balance of the year, you should expect that to continue. As we do more M&A, you'll see that come through. But if we're not seeing a strong conversion of our M&A pipeline, you'll see us repurchase shares as long as our prices remaining attractive. And our goal is, on a consistent basis, to deploy at least our free cash flow on an annual basis.

Emma Giamartino:

Yes.

Emma Giamartino:

That is fair.

Robert Sulentic:

Steve, first of all, there's 2 areas of our business where it really comes through in our numbers. One is our sales business, one is our development business where we sell assets and generate profits from that. At the beginning of the year, the assumption of our teams was more bullish about the trajectory of interest rates than it is now without a doubt. That shouldn't surprise anybody. I'm sure that's true across the whole market. It's also true of buyers and sellers of assets in general. And as a result, it's just slowed down activity on the sales side.

Steve Sakwa:

Okay. And then last, I just wanted to clarify. I think you said, I may have missed it, that there was a tax benefit in the in the reported core EPS number this quarter. But I don't know if you sort of quantified it, and I don't recall seeing a specific mention of that in the release. So could you just clarify that, please?

Operator:

The next question is coming from Jade Rahmani at KBW.

Robert Sulentic:

Project management, in general, Jade, is a big, big growth opportunity, project and program management not limited to infrastructure. Corporates are doing a lot of work. There's work in natural resources. That's -- we see that as well into the double digits enduring grower, and it's now become a very big business for us.

Emma Giamartino:

Yes. And Jade, on the pipeline comments, can you just give us more on what you're seeing -- or what you're hearing that's different from what we've said previous?

Emma Giamartino:

Got it. Okay. So that $900 million is not a new information. When we provided our outlook at the beginning of the year for GWS, it was for that $900 million of -- and more of net revenue growth. That was going to come in to GWS in the back half of the year. And that's why we've been talking about the growth accelerating above trend on the revenue line in Q3 and Q4.

Robert Sulentic:

Yes. Jade, it's not a headwind that we haven't contemplated in our comments about expected growth for that business. And I made the comment last quarter that we don't have a single client in GWS that I'm aware of, and we work with the biggest tech companies, the biggest financial companies, et cetera, that doesn't view their office space as a critical asset for the operations of their business.

Stephen Sheldon:

And just one for me. Great to see the improvement in office leasing. So I just wanted to ask about the other major leasing sector industrial. Are you seeing things there get any better or worse? And what do you think they [indiscernible] for leasing activity to stabilize and return to growth at some point?

Operator:

The next question is coming from Michael Griffin of Citi.

Robert Sulentic:

A lot in the higher-quality assets, Michael. I mean we're seeing record rental rates in some of the bigger markets in the higher-quality assets in New York as an example. We're seeing financial institutions and business services companies, in particular, taking more space. Tech is way down. But for us to have this leasing picture in tech be off the way it is, we view that as good news for us because there is nobody that pays attention to tech that thinks long run. They won't, a, get more of their people back in the office; and b, grow -- be disproportionate growers relative to the rest of the economy.

Michael Griffin:

Emma, you talked about, I think, the $50 million tax benefit in the quarter. Just in for this, I think it would be about $0.61 of earnings in the quarter. Is that the right run rate and cadence that we should think about to get to the midpoint of the full year guide? Or how should we think about that?

Michael Griffin:

Yes, yes, yes. No, that does it. And then just one last one. I noticed that you didn't provide the 2025 outlook, I think, relative to last quarter in your presentation. Is the expectation still to return to peak earnings growth in '25 or get close to it?

Operator:

The next question is coming from Peter Abramowitz of Jefferies.

Emma Giamartino:

So it varies across regions in the U.S. That is what we saw later in the quarter. There was an uptick as rates increased. But in EMEA and APAC, we didn't see that trend just given that there is different dynamics going on there and EMEA is ahead of the curve in terms of their recovery in the sales market.

Robert Sulentic:

There's been some distressed debt activity, selling of distressed debt. There's also been some activity, I'd call it more pending activity of selling debt portfolios that aren't distressed just because people's concern about their debt portfolio, may sell non-distressed portfolios at a slight discount.

Operator:

The next question is from Patrick O'Shaughnessy of Raymond James.

Robert Sulentic:

Yes, Patrick, they weren't strategically important. We may have at one time thought they were more strategically important than we do now. In fact, that's almost inevitable given that we were spending money on them and we've stopped.

Operator:

The next question is coming from Anthony Paolone of JPMorgan.

Robert Sulentic:

Yes, Anthony, I'll add. First of all, I really think to put it in perspective, you got to pay attention to the size of that number relative to the size of that business. Again, it's $15 million to $20 million of costs that hit the bottom line in a negative way relative to what we had expected, if you ignore the medical roughly. Is that right, Emma?

Robert Sulentic:

Thanks, everyone, for being with us, and we look forward to discussing our second quarter with you in about 90 days.

Brad Burke:

Good morning, everyone, and welcome to CBRE's Fourth Quarter 2023 Earnings Conference Call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks, and an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that, today's presentation contains forward-looking statements, including without limitation statements concerning our economic outlook our business plans and capital allocation strategy and our financial outlook. Forward-looking statements are predictions, projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation appendix. I'm joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now, please turn to slide 5, as I turn the call over to Bob.

Emma Giamartino:

Thanks, Bob. Before turning to segment performance, please turn to Page 6, as I provide more insight into our resilient businesses. We've used this term regularly in our earnings calls over the last several quarters and it is now being used broadly in our sector. CBRE defines resilient businesses, as those which hold up well in a down market cycle, either because of their noncyclical characteristics or because they benefit from secular tailwinds. For CBRE, those businesses include the entire GWS segment, loan servicing, valuation, property management and recurring asset management fees in our investment management business. When we use this term, this is the group of businesses we are referencing. These resilient businesses in aggregate generated nearly $1.6 billion of SOP in 2023 and are expected to generate $1.8 billion of SOP in 2024. This would represent a sixfold increase from 2011, the first full year of market recovery following the global financial crisis. We expect 2024 to be the beginning of a market recovery, albeit a more gradual one. For context, our resilient businesses have grown SOP over 3x as fast as our transactional businesses, since 2011 and they are expected to be nearly double the size of our entire business at a similar point in the last cycle. Please turn to Page 7, as I review our results and outlook for 2024. Across the advisory segment, net revenue and SOP essentially matched the prior year's Q4. Leasing saw a slight uptick in revenue for the quarter driven mostly by EMEA and APAC. Globally, higher office leasing offset slightly less industrial activity. Within property sales, industrial and retail declined less than multifamily and office, supported by healthy fundamentals. Commercial mortgage origination revenue growth was attributable to interest earnings on escrow balances. The rest of our advisory business lines together achieved a 6% net revenue increase. Turning to Page 8. GWS had another strong quarter. Net revenue and SOP grew by double-digits. Facilities Management net revenue increased 14% for the quarter and 13% for the year. Most significantly, our sizable GWS local business has been increasing net revenue at or above a mid-teens clip, and is well positioned to sustain this growth rate for the long term. Project Management net revenue grew 11% for the quarter and 14% for the year. This was led by the large-scale program management work being done globally by Turner & Townsend. Notably, we had record pipeline conversion to new GWS contracts during Q4 with a balanced mix of new clients and existing client expansions. Turning to Page 9. SOP in our REI segment increased to $68 million in Q4, up from just $17 million in the prior year Q4. Development exceeded expectations due to the earlier than anticipated monetization of several assets in the US. Investment Management operating profit rose significantly in Q4, driven by higher incentive fees and recurring asset management fees. Investment management AUM ended 2023 at $148 billion, up $3 billion for the quarter, largely driven by favorable currency movement and modest net capital inflows, which offset lower private asset values. For the year, AUM was down $2 billion. While exit value declines appear to be slowing, we anticipate values will remain under pressure in early 2024. Before turning to our 2024 outlook, I'll comment on our capital allocation strategy on Slide 10. We are on track to deploy more than $2 billion of capital for the 12 months ending Q1 2024. This deployment includes M&A, mostly in our resilient businesses and a record level of co-investment commitments in REI. By thoughtfully using our balance sheet we made targeted opportunistic investments, while other investors have been largely on the sidelines. These investments have been underwritten at returns, well above our cost of capital. And specifically, our REI investments are projected to generate notably high returns. We also repurchased nearly 8 million shares in 2023 at a time when we believe they have been attractively valued. Our 2024 capital deployment will be supported by improved free cash flow, which we expect to total at least $1 billion, as certain headwinds reversed this year. As we've previously discussed, we had several large cash expenses in 2023 mostly timing-related items, such as cash variable compensation and cash income taxes tied to 2022 record results that did not flex down with last year's lower earnings. We estimate that the reversal of these items alone will drive a $500 million benefit to free cash flow compared with last year. Taking all of this into consideration, we expect to end 2024 with net leverage around one turn. Now I'll review our 2024 outlook on Slide 11. In the advisory segment, we expect net revenue to increase by mid- to high single-digits, with mid-teens SOP growth. The expected margin improvement reflects fixed cost leverage and the benefit of ongoing cost reduction initiatives. Advisory accounts for about two-thirds of the $150 million run rate cost savings initiative announced last quarter with half of the benefit being realized in 2024. These savings offset cost growth elsewhere in advisory this year notably from higher expected discretionary compensation tied to improved financial performance. We anticipate that capital markets revenue will grow by mid-single digits. Investor sentiment has improved in the last nine days, reflecting a better interest rate outlook. Real estate allocations are approaching target levels and this reflects an easing of the denominator effect, as public equity markets have rebounded while private relist values are being written down. We expect leasing to grow modestly in 2024. We are cautiously optimistic that the worst is over for office leasing, particularly for Class A properties, where we generate approximately two-thirds of leasing revenue. Leading indicators from our data partner VTS indicate US office demand has been gradually turning up over the last six months. The growing consensus about an economic soft landing coupled with the apparent stabilization of office utilization rates may make more employers confident enough to commit to office leases. Additionally, leasing demand should remain relatively strong for industrial deals particularly for properties under 500,000 square feet. Our remaining advisory business lines together are expected to achieve low double-digit net revenue growth. In the GWS segment, we expect mid-teen SOP growth including the expected partial year contribution from the J&J acquisition. Continued strong organic growth will be driven by broad demand across client sectors and geographies. The local business will lead growth in GWS expected to generate more than $200 million of operating profit as we benefit further from our investments in this business. Our enterprise business is also seeing strong demand from both mature sectors like financial services as well as newer adopters of outsourcing such as industrial, healthcare and life sciences companies. Within project management significant growth will be led by Turner & Townsend, which is in the early stages of penetrating the US. market. We anticipate seeing most of the revenue impact from our sizable Q4 wins in the second half of 2024 as new clients are onboarded. And even with the record level of conversions in Q4 our GWS pipeline ended 2023 10% higher than the prior year. Shifting to REI. We expect SOP in 2024 to be slightly below 2023's level. Note that last year's SOP included a single development portfolio sales, which generated more than $100 million of profit in Q1. In Investment Management, we expect operating profit to increase modestly from 2023 as stabilizing market conditions drive higher promote fees and improved co-investment returns. We expect development operating profit will be subdued this year as the projects we expect to monetize will be sold at higher cap rates than we underwrote at the peak of the prior market cycle. At current market cap rates we have hundreds of millions of dollars of operating profit embedded in our in-process portfolio and a pipeline of new opportunities with an attractive spread between our cost of development and current market value. On balance, we are cautiously optimistic about 2024. Our expectation of achieving core EPS of $4.25 to $4.65 is contingent on long-term interest rates remaining around current levels the Fed proceeding with the anticipated short-term rig cuts and the US economy avoiding a recession. This year's earnings are likely to be more heavily weighted than usual to the second half. The third and fourth quarters are expected to account for approximately two-thirds of our EPS while the first quarter will contribute a mid-teens percentage of the annual total. This distribution is similar to what we experienced in 2021 when we also had a second half recovery. We continue to see a path to returning to our prior core PS peak in 2025. That path is supported by continued double-digit growth in our resilient businesses and a gradual recovery in our transactional businesses. Importantly, CBRE can reach prior record earnings without our transactional businesses SOP rebounding to 2019 levels. With that operator, please open the line for questions.

Anthony Paolone:

Okay. Thank you. Good morning. I guess, my first question is I look at the guideposts for the various business lines. They seem kind of pretty good from our vantage point. But just wondering if you could talk about things like the corporate segment taxes, interest expense creation all that sort of other stuff and any year-over-year drags or ability to quantify any notable drags from those items as we think about going down to EPS.

Anthony Paolone :

Okay. Thanks. That's helpful. And then just in terms of you talked about ending the year with a turn of leverage and it sounds like incremental investment into REI and so forth and then obviously J&J, but just like how much of the benefit from all of the capital investments do you think you'll see in 2024 versus 2025 or in future periods?

Anthony Paolone :

Okay. Thank you.

Steve Sakwa:

Great. Thanks. And I guess just on capital deployment, I realize with the stock may be shooting up a lot in the fourth quarter that temperature enthusiasm for share buybacks. You only did about $20 million in the quarter. Just with share buybacks sort of fit in on the capital deployment in 2024 or at least within your guidance?

Steve Sakwa:

Okay. And I know you provided a bunch of guidepost certainly on the revenue side. I just want to make sure from a margin perspective, I just kind of understand, how are you thinking about the SOP margin in advisory? And is there any sort of baked in improvement to margin in the GWS business?

Steve Sakwa:

Great. Thanks. That’s it for me.

Jade Rahmani:

Thank you, very much. There's considerable uncertainty in the multifamily market. Walker & Dunlop just said on its earnings call that the GSEs Fannie and Freddie expect flat volumes for 2024 which is surprising given how low volumes were in 2023. In addition, we are seeing pockets of credit issues in floating rate loans and then significant supply. So I wanted to ask, if you could comment on your overall volume expectations within that sector. And also as it relates to Trammell Crow, I think that around 30% of that business's projects are multifamily, do you expect any issues bringing those to fruition and generating target returns.

Emma Giamartino:

And then on the GSEs, we have embedded in our forecast pretty much OMSR being flat to slightly up this year. Sentiment that we're seeing from the agencies is that they will get closer to their cash this year. But we are being conservative in terms of what we're projecting for the year. So, slightly more positive than what you heard on the Walker & Dunlop.

Bob Sulentic:

Well, it is the case that we think it has bottomed out. It obviously is below -- meaningfully below where it was occupancy is square footage per person is below where it was per employee is, below where it was in 2019. There is all kinds of anecdotal evidence around that issue, some stubbornness people coming back to the office. That's super clear. The other thing is there's just a clear amount of pressure from companies to get their people back into the office for all kinds of reasons. What we do know and I would say anecdotal evidence in this area is not just evidence it's an avalanche of evidence. Every company that you talk to, you can't talk to a corporate that would tell you that office building occupancy, either in buildings they own or building they lease is not important to their business. It's important to all of them. It's important to us in our business. And so what you're seeing is that people are redoing their space, trying to make it a better environment for their employees, make their employees more efficient, more engaged. Class A buildings that create that opportunity are seeing in a number of markets record rents. Buildings that aren't good are struggling and they're going to continue to struggle. So we look at that circumstance, and we say there's pressure on both sides, but we think it's kind of stabilized. We think it will be a very big asset class going forward, bigger than the headlines might suggest because people tend to like negative news. And in the real estate services business, as opposed to the real estate owning businesses and we're in both of them. It's going to be a very large opportunity for CBRE, and you saw that with the Brookfield situation that we announced. You see that with the growth in our outsourcing business. You're seeing it come through in our leasing numbers. So I think that you're going to see the future be better than the current circumstance has been for a variety of reasons.

Bob Sulentic:

We're -- well, Jade, you're talking about the blurred lines between real estate and infrastructure and some regard. And in those areas data centers and so forth we do have meaningful exposure. The places where we have kind of traditionally defined infrastructure exposure or with the Turner & Townsend business where they provide a lot of program and project and cost consulting services to infrastructure-type projects and they are really well-positioned for the future in that regard. We have an infrastructure investment management business that we would like to scale over time. And then in Trammell Crow Company, we do a variety of development. There are some things we're working on that are quite large between Trammell Crow Company and Turner & Townsend that would be in the infrastructure category. So, we believe over time we'll evolve to a place where we will do more work and invest more in infrastructure, but real estate is our core business for the time being.

Stephen Sheldon:

Hey, thank you. Really nice job here and congrats on the J&J deal. With J&J likely to close here in the coming months, I just wanted to ask kind of what your appetite is for pursuing other large acquisitions? I know you guys are kind of looking at least a few larger deals. So, just curious if you have any commentary on what your appetite is if you're still pursuing or looking at some larger acquisitions.

Stephen Sheldon:

Got it. Thanks. And then just in capital markets just kind of just as we think about the last few months how did activity progress through the fourth quarter into early January. I'm just curious whether you've seen fits and starts of activity based upon what's happening with interest rates? And just generally, how dependent do you think any capital is improvement in 2024 and I guess into 2025 will be on the overall trend in interest rates?

Stephen Sheldon:

Great. Thank you.

Michael Griffin:

Great. Thanks. Just maybe going back to the guidance for a minute, and I appreciate you guys including it this year. I'm just curious if you can quantify give us a sense of if there are any cost savings initiatives factored into your outlook? I want to get a sense of how much of this growth is organic versus cost cutting?

Michael Griffin:

Got you. That's helpful. Then maybe on the REI segment. I was curious, if you could give us some insights into how development costs have been trending and where return hurdles and IRR is currently in the space what would get you more interested in starting projects?

Michael Griffin:

Great. Thats it for me. Thanks for the time.

Alex Kramm:

Yes. Hey, good morning, everyone. And maybe nitpicky here a little bit, but can you just talk about your 2025 commentary from this morning, I think a quarter ago, you were still talking about achieving records. Now I think you're just hoping to get back to peak. So not sure if, it's the environment has changed or adjusting your I guess outlook incorporates a more conservative recovery in general. So maybe just compare and contrast, how we should be thinking about your long-term outlook as you go into 2025?

Alex Kramm:

All right. Fair enough. And then just maybe a quick follow-up on the cost base. I mean, it looks -- I mean obviously, you guys cost program in place. Since you've done a lot over the last few years, can you maybe just remind us where you think incrementals are on the transactional side and break it out maybe between capital markets and leasing, as we had potentially a recovery here?

Alex Kramm:

Make sense. Thanks.

Bob Sulentic:

Thanks very much, everyone, and we look forward to connecting with you again in 90 days.

Brad Burke:

Good morning, everyone and welcome to CBRE’s third quarter 2023 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials. Before we kick off today’s call, I will remind you that today’s presentation contains forward-looking statements, including without limitation, statements concerning our economic outlook, our business plans and our financial outlook. Forward-looking statements are predictions, projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning’s earnings release and our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures together with explanations of these measures in our presentation deck appendix. I am joined on today’s call by Bob Sulentic, our President and CEO and Emma Giamartino, our Chief Financial Officer. Now, please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino:

Thanks Bob. Please turn to Slide 6 for a review of Advisory Services results. This segment’s net revenue fell 17% and SOP declined to 35% versus the prior year’s Q3. Across geographies, APAC showed the best relative performance with revenue up 3% led by continued strong growth in Japan. Revenue was weak across EMEA declining 18%, slightly better than the Americas, where revenue fell 21%. The revenue decline was most pronounced in property sales, which decreased 38% with both fires and sellers pausing amid the sharp and unexpected interest rate increases over the past 90 days. EMEA sales revenues saw the greatest decline at 47%, while APAC sales revenue fell only 12%. In the Americas, property sales revenue dropped 41%. Ironically, compared with other major property types, office saw the least severe decline due to weak prior year comps and seller capitulation. Industrial sales were largely limited to properties under 300,000 square feet and multifamily sales were concentrated in core and core+ properties as investors focus on the highest quality properties to mitigate risk. Commercial mortgage origination revenue fell less than property sales, down 18%. The decline was tempered by our significant business with the GSEs, which have taken share amidst the broader pullback in lending. Beyond Capital Markets, our leasing revenue declined by 16%, a few percentage points below what we had anticipated going into the quarter. Significant growth in several APAC countries was offset by lower revenue in both EMEA and the Americas. Economic uncertainty continues to delay occupier decision-making, particularly for large office and industrial deals. For example, leasing revenue declined by 23% in the U.S., but the number of leases completed was only down 10%. The remaining lines of business in our advisory segment were relatively flat with growth in both loan servicing and property management, offsetting weaker valuations revenue, which is tied to sales and financing activity. Please turn to Slide 7 as I discuss the GWS segment. GWS posted another strong quarter with net revenue and SOP increasing by 14% and 15%, respectively. Both facilities management and project management generated mid-teens net revenue growth. Our business continues to benefit from our focus on industry sectors that allow us to meet the unique needs of our diversified client base. Growth year-to-date has been notable in 3 sectors. Health care due to our enhanced capabilities to meet client needs, energy spurred by strong expansion with existing clients, along with growth in renewable energy, an industrial logistics, an industry that is increasingly embracing outsourcing in their manufacturing plants to reduce costs. We are also seeing continued strong revenue growth in our GWS local business driven by a mix of new and existing clients. Investment in our U.S. local business, which I discussed last quarter, resulted in several new wins and accelerated revenue growth. In addition, our Turner & Townsend project management business continues to outperform expectations, most notably through their expansion in the U.S. Our GWS pipeline reached a new record in the quarter, with one-third of our pipeline coming from first-generation outsourcing clients. That is clients who have not previously outsourced their real estate operations. The growth in first-generation pursuits reflects corporation’s increased interest in reducing occupancy costs amid the uncertain economic environment. Our remaining pipeline is filled with occupiers that are looking to either expand their scope of services with CBRE or switched their service provider to CBRE because of our ability to provide more integrated global solutions. Margins improved slightly in Q3 due to strong revenue growth that offset the investments made earlier this year, allowing us to achieve operating leverage. We anticipate further margin expansion next quarter. Now I’ll turn to Slide 8 for a discussion of the REI segment. Overall SOP totaled just $7 million, reflecting few U.S. development asset sales and lower operating profit in our Investment Management business. Within Investment Management, the decline in operating profit was primarily driven by negative marks in our more than $330 million co-investment portfolio compared with positive marks last year as well as lower incentive fees. AUM declined sequentially to $144 billion, primarily due to lower property valuations and negative foreign currency effects, which offset modest net inflows. While fundraising has decelerated materially across the sector, including for CBRE, investors remain keenly interested in higher target return strategies to take advantage of current market stress and dislocation such as opportunistic secondaries and value-add real estate strategies. And we have committed almost $200 million year-to-date in co-investment capital in support of these strategies. This is a record level of co-investment across our funds and a substantial increase in our commitment to higher return strategies. We have focused on follow-on funds with strong track record and led by experienced portfolio management teams. Development results were below expectations due to deals slipping into 2024. Historically, we’ve covered the U.S. development business’s operating costs with project fees, and we expect this to be the case going forward. Our in-process portfolio was flat with last quarter as we added a few new projects, but also did not have any meaningful asset sales. Note that we have refined our development portfolio definition to better reflect projects that are actively under construction. The primary change is that the definition of in-process now only includes projects that have started construction, whereas the prior definition included projects that are under our control with construction expected to start within 12 months. The environment for harvesting development projects and recognizing the related gains has become increasingly challenging. The project sale process is progressing more slowly than we typically see, driven by increased caution from buyers. This has been elongating the sale process rather than impacting pricing. However, we are reaching a point where pricing will be impacted. And in that case, we will proactively decide to hold well-capitalized assets until market conditions improve. As Bob noted earlier, these circumstances, which put downward pressure on our business in the short-run, create opportunities to secure assets that will lead to substantial future profits. Looking forward, we have continued to invest in development with more than $150 million committed year-to-date. These investments are focused on securing multifamily and industrial projects at a time of capital market dislocation that we expect to deliver historically attractive returns. Please turn to Slide 9. As we’ve noted, the current environment is providing opportunities to deploy capital strategically. With respect to M&A, we continue to evaluate many opportunities across our lines of business. However, we are being disciplined about pricing and thorough in our due diligence. Just as the rise in interest rates and increased uncertainty impacts real estate transactions, it also affects M&A deals. We have passed on otherwise attractive deals where we could not close the gap in pricing with sellers. Our total rates to achieve returns above our risk-adjusted cost of capital have increased along with interest rates. The seller pricing expectations for the most part have adjusted more slowly. In the meantime, we completed over $500 million of share repurchases during the quarter, bringing our year-to-date total to $630 million. Volatility during the third quarter allowed us to get close to our share repurchase target for the full year. I want to reiterate that while we are looking to take advantage of this period of investment opportunity, we remain highly disciplined around pricing, and we are fully committed to maintaining an investment-grade balance sheet with a leverage ratio below 2 turns. Next, I’ll briefly touch on cash flow and cost reductions. Full year free cash flow is tracking below our prior expectations primarily due to lower earnings. In addition, several large uses of cash, mostly timing-related items such as cash compensation tied to last year’s results do not flex down with this year’s lower earnings. As a result, these items are a headwind to free cash flow this year. As these timing impacts reverse next year, we anticipate a significant improvement in our 2024 free cash flow generation. We discussed earlier this year that we were prepared to cut costs further if the market environment deteriorated. That time has come, and we will be reducing costs across our lines of business. We have already targeted $150 million of reductions in our run rate operating costs, primarily focused on our transactional lines of business that have been most negatively impacted by the market downturn. We expect to provide more detail on the benefit of our cost savings actions when we provide 2024 guidance next quarter. Turning to our outlook. As Bob noted earlier, we now expect core EPS for the full year to decline by mid-30%. Our expectations for double-digit revenue and SOP growth in our GWS segment are more than offset by capital markets-driven SOP declines in advisory and REI segments. Looking to next year, while the recovery of transaction activity, particularly in capital markets, will take longer than initially anticipated, we expect double-digit growth of our resilient and secularly favored lines of business, which combined have exceeded $1.5 billion of SOP on a trailing 12-month basis. In addition, we will continue to benefit from strategic deployment of capital and our cost reduction initiatives. Taking into account all of these circumstances, we believe this year will be the trough for our earnings and anticipate meaningful growth next year. However, our return to record earnings will likely be delayed a year relative to our earlier expectations. With that, operator, we’ll open the line for questions.

Anthony Paolone:

Great. Thank you, and good morning. My first question relates to leasing and the hesitancy by occupiers to make some decisions there, dial down just the size of deals. Do you think that’s on the front end at this point? Where that hesitancy is just starting? Or do you think that’s been happening for a while now? I’m trying to get a sense as to how we should think about leasing as we look at the next few quarters?

Anthony Paolone:

Okay, thanks. And then you called out investment management as a focus area on the M&A side. Are you seeing specific deals that are making more sense there or is that just an area that thematically like?

Anthony Paolone:

Okay. And then just Emma, one last clarifying item, if I can. Did you mention you thought the recurring businesses like GWS were going to grow double digits in ‘24? Or was that just for ‘23? I didn’t catch that.

Anthony Paolone:

Okay. So you feel comfortable with that double-digit number around GWS, for instance, for ‘24 as well?

Anthony Paolone:

Okay, thank you.

Steve Sakwa:

Yes, thanks. Emma, I just on the share buybacks. I know in the last call, you had talked, I think about doing $600 million, you guys did a little north of $500 million this quarter. So I guess, are you still sticking with that $600 million number for the back half kind of implying a fairly low fourth quarter number? I know that kind of ties in maybe with lack or less free cash flow. So just any thoughts around buybacks for the rest of the year?

Steve Sakwa:

Okay. And look, I know everybody is highly focused on the sales environment that really seems to kind of be the linchpin for the company. Bob, you’ve obviously talked about maybe a second half recovery. Just sort of trying to think through kind of the timing? And is it more the economy that you think is driving people uncertainty? Is it the absolute level of interest rates? Is it the fact that the banks and insurance companies aren’t really lending money. I know all of it impacts it. But is there one factor that you think is more pronounced than another?

Steve Sakwa:

Okay. And then one just small technical one. I guess we noticed that the tax rate in the quarter came in much lower than expected. I think that might have helped kind of EPS. Just kind of what are your thoughts and what drove that in the quarter? And I guess is that sort of a sustainable lower tax rate? Or is that more of a one-off issue in the quarter?

Steve Sakwa:

Great. Thank you.

Jade Rahmani:

Thank you very much. On leasing, if new tenants are taking 10% to 20% less space, and there is some pressure on net effective rents on the office side as well as the overall uncertainty around demand for office space. And then you mentioned some of the slowdown in industrial and then I would characterize retailers mixed. Do you think that leasing would be negative in 2024?

Jade Rahmani:

And then on GWS. I understand the long-term opportunity and gaining the penetration rate by passing on cost savings to those that don’t currently outsource. But there are friction costs associated with this as well as execution complexity and uncertainty. Would not the macro backdrop create headwinds in GWS as well and thereby put some pressure on the double-digit growth. I mean, if the economy is slowing down, it seems that business’s double-digit growth profile could be at risk. Could you give some reasons why that’s not the case?

Jade Rahmani:

Thank you very much. Finally, just on REI, have you changed series underwriting toward the capitalization and acquisition of new projects to account for potentially rates remaining at current levels? And does the outlook for asset sales depend more on timing or a moderation in interest rates in order to refinance those deals and sell at attractive cap rates.

Jade Rahmani:

Thank you for taking the questions.

Operator:

Thank you. Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.

Emma Giamartino:

So office leasing this year has been performing in-line with our expectations. There has been some we noted some drop-off in the larger office deals, but we were anticipating decline a mid-15% decline across office leasing. On the industrial side, that is – industrial leasing is performing slightly below expectations. But as Bob alluded to, that is primarily driven by the largest industrial transactions and the largest occupiers of industrial space who took on a lot of space over the past couple of years and are resetting. We don’t expect that to be a continued trend going into next year. And in terms of mix, I think our leasing has grown. Industrial has grown as a percentage of our overall leasing and offices declined, but that isn’t out of what we were expecting going into the year and into the quarter.

Bob Sulentic:

Well, this – what typically happens in an environment like this and what is definitively happening now on the development side, where the investments we make are largely acquiring land for future development. Landholders often landholders that bought that land to develop it, you can’t develop it because they can’t get the capital to develop it or they don’t have the capital themselves to make the co-investment needed to develop it. And so good land sites that otherwise wouldn’t have been available become available. And because of our position in two ways, our balance sheet, plus the stable of really strong developers we have in local markets. We identify opportunities of this nature. We’re in the market all the time, up and down cycles. We know the land sites that are good. We know the land sites that we would have liked to have gotten that we didn’t get. And what we do is we go back because we now have the capital to take those land sites down, we go back and try to secure some of those sites. And cycle after cycle, what you see is that it’s the acquisition of those land sites and the development deals that result from those land sites that become your best profit deals. And as Emma said earlier, we’re focused on multifamily and industrial there. On the investment management side, we think this is a good point in the cycle to look at value add and opportunistic. So, we have an opportunistic fund run out of the UK that’s got a very, very strong track record that we have made a significant commitment to with our own balance sheet to raise the next fund to do investments in real estate secondaries and we are very excited about that opportunity. And then we have three value-add businesses, one in each region of the world U.S., EMEA and Asia Pacific, all of which were providing co-investment to do our next fund in, all of which we see lots of opportunity in. So, that’s our co-investment strategy. That’s what – when we talk about $370 million year-to-date, that’s where we have invested. And we are well positioned to continue to invest.

Operator:

Thank you. Our next question comes from the line of Patrick O’Shaughnessy with Raymond James. Please proceed with your question.

Bob Sulentic:

Well, there is – clearly, there is movement into cash and cash return – you can get returns on that, that you couldn’t get previously, so secured debt, etcetera. There is no doubt that, that dynamic is at play in what’s going on with the non-traded REITs, etcetera and core assets. But people are ready to get back into real estate when things sort out. There is just no doubt about it. The amount of capital that’s on the sidelines that wants to get into commercial real estate is enormous. And what’s going to have to happen as we said, is interest rates are going to have to stabilize and the belief that valuations have come down is going to have to be there. There is an increasing interest, and I just walked through what we are doing on the development side and opportunistic investment side. There is an increased interest in people getting into those areas that have a longer horizon for returns on their capital and have a higher risk appetite. And there is always, of course a big chunk of capital with that orientation. So, that’s what’s going on.

Emma Giamartino:

There is potentially some, but we are not expecting the decline next year to be greater than what we saw this year. And I think what’s important to note, we provided some high-level remarks around what we are expecting over the next couple of years. And that’s not to provide any sort of guidance around what we will expect because we all know that it’s very difficult to anticipate how the broader external factors will impact the company. But to put context around it, we are very confident that our GWS business will continue to deliver double-digit growth. And if it delivers double-digit SOP growth over the next couple of years, and the remainder of our segments remained flat in 2024 and get back to – don’t even need to get back to 2019 levels of earnings, we will get back to our record levels of EPS. So, in terms of leasing, I just want to emphasize that even if there is a slight decline next year, we still have a path to growth over the next 2 years.

Operator:

Thank you. Our next question comes from the line of Alex Kramm with UBS. Please proceed with your question.

Emma Giamartino:

Okay. So, for the full year, we are expecting within GWS that our SOP growth will be in line with that low-double digit that we have been talking about throughout the year. Advisory overall will be down about in the 30% range. And then REI, as you know is down a little over 50% for the full year. In terms of what’s guided our reduced outlook from what we said in Q2 to what we are seeing now from that 20% to 25% EPS decline down to a mid-30s decline. About a third of that is related to capital markets and about a third is related to development and the remainder is men across the rest of the business.

Emma Giamartino:

Absolutely. That – and that is the point that we are trying to get across is that there is a reasonable path to getting back to record, and we are not anticipating a sharp recovery, especially not next year, and we don’t require a sharp recovery in 2025 to get to that record level. Again, our resilient and cycle favorite lines of business, which include GWS but also includes property management, the recurring elements of our investment management fees, valuations in loan servicing, not in aggregate is $1.6 billion of SOP. So, that growing at low-double digits over the next 2 years will create meaningful value. And then, again, our transactional lines of business, so development, the portion of investment management that is more transactional loan service – loan origination and sales origination. Those elements only need to get back to just shy of 2019 levels for us to get to record earnings.

Emma Giamartino:

Yes. So, in your first question, our pipeline across GWS and that includes both facilities management and project management is it continues to be at record levels. We have a large and growing pipeline. It’s split between about 50% new clients and 50% existing clients. And of those new clients, about half of those are first-generation clients. So, about a third of our overall pipeline is first-generation outsourcers. But the important part is that our overall pipeline is building. And yes, those first-generation outsourcers take longer, the sales cycle is longer to convert them over to outsourcing, but it’s a huge opportunity and it’s a growing opportunity and it is building our pipeline. To your second question around what the opportunity is, it’s hard to accurately estimate it, but we believe that only 30% of the overall market is outsourced today. So, there is 70% of white space.

Operator:

Thank you. Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.

Bob Sulentic:

Well, we – the biggest thing, Michael, that’s shifted in our view is that it’s going to take longer for interest rates to come down. It’s going to take longer for debt, in particular, to become available for real estate – commercial real estate transactions. And as a result, transactions are not going to return until the back half of next year, where we thought they were going to return late this year, early next year. Secondly, we have introduced this notion that we are seeing, particularly with industrial tenants that the uncertainty is just causing them to pause, and we think that’s going to go through the first half of next year. But we really don’t think that’s going to be a big deal because they are burning through inventories of space that they took down for defensive purposes, I guess for lack of a better term. And so that’s what we see where if you were to sum it all up, the recovery that we thought would start towards the end of this year, we now think is going to start six or so months later, maybe a little longer. And for us, that pushes back our assumptions about the return to peak earnings a year or so into the following year.

Bob Sulentic:

For us specifically, we just have a very good business in Japan. And it’s – obviously, that’s a huge economy and Tokyo is a huge real estate market. And over the years, we – there has been a struggle around the notion of intermediation there. There was a lot of business done directly by buyer and seller, tenant, landlord, etcetera. That intermediation has become more accepted. There has also been a struggle to have non-Japanese domestic companies in the mix, so to speak. And that is – as it relates to being the designated intermediate – when intermediation happens and also being a home for talent. We have really changed our profile as a recruiter there over the last few years. And we have really changed our profile over there the last few years as somebody that’s a recognized intermediary. As a result, we used to talk about, well, we have got good growth in Asia, but good growth on bases of business that weren’t that needle moving to our overall results. Japan is now our second most profitable market in the world behind the United States for advisory business. So, when Japan does relatively well as it’s doing now, you get the results we are getting. It’s big enough to be needle moving for us. And then in general, as you know, the return to the office across Asia and Pacific is ahead of where it is in either the United States or EMEA.

Operator:

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Bob Sulentic:

Jade, in terms of M&A, we – Emma made this comment. We look across our whole business. We have a very capable corporate development team that partners up with a group of geographic and business line leaders across the whole business around the world and across our lines of business to seek out M&A opportunities where we think we can enhance our offering to our clients. We just – you just saw today, we announced something in the – for our capital markets business in the investment banking capital advisors area. That was an area where we thought we had a bit of a hole. We went out and brought on a business that was very substantial global and additive. Lots of areas of interest, investment management has been an area of interest for us, but sole of others. We have several areas of interest in our GWS business. We have select areas of interest in our advisory business. We even have some areas we are looking at in the development business. But one of the things that’s going on right now, and Emma mentioned this, is that pricing for M&A has not moved quite as quickly as we hoped or thought it would. And we are just showing a lot of – excuse me, a lot of discipline around what we are going to do in terms of acquiring other companies. We are just simply not going to pay prices that we think are unreasonable just to get businesses that we like. We think pricing is going to come into line. We see some signs of that. We have got a pipeline across those businesses and geographies that we like, but we are being disciplined. As it relates to infrastructure, there is two areas of our business where we are active with infrastructure. We have a nice size infrastructure investment management business. It’s small relative to our overall investment management business, but it’s in the upper-single digits in terms of billions of dollars of AUM, and we are looking for opportunities to grow that because we think it’s got great long-term secular profile. The other place where we have a very significant infrastructure business is with the Turner & Townsend acquisition. They do a lot of infrastructure, program management, cost consultancy and project management. And they are well positioned – they are very well positioned in geographies around the world where that work is going on. They do a decent amount of work and a significantly growing amount of work as it relates to sustainability. So, we have a pretty strong infrastructure profile with them.

Operator:

Thank you. We have reached the end of our question-and-answer session. And at this time, I would like to turn the floor back over to CEO, Bob Sulentic for closing comments.

Operator:

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.

Brad Burke:

Good morning, everyone, and welcome to CBRE’s second quarter 2023 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an excel file that contains additional supplemental materials. Before we kick off today’s call, I’ll remind you that today’s presentation contains forward-looking statements, including, without limitation, statements concerning our economic outlook, our business plans and our financial outlook. Forward-looking statements are predictions, projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning’s earnings release and our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I am joined on today’s call by Bob Sulentic, our President and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino:

Thanks, Bob. On a consolidated basis, growth of our resilient lines of business continued during the quarter. Together, these businesses, which consist of our entire Global Workplace Solutions business, loan servicing, property management, valuation and the asset management component of investment management saw net revenue rise 10% in constant currency. Please turn to Slide 6 as I discuss our Advisory Services results. Weakness in capital markets had a pronounced effect on the advisory business. Advisory net revenue fell 21% against a challenging prior year comparison when net revenue grew by more than 20% versus Q2 2021. Our capital markets businesses, property sales and loan origination together saw revenue fell 44% versus a 13% increase in the prior year second quarter. In the Americas, property sales revenue fell 49% more than expected, reflecting limited credit availability and the gap between buyer and seller expectations. We are beginning to see an uptick in investor appetite for industrial assets where buyers will accept modest negative leverage due to the significant embedded rent gains over the past several years. In U.S. multifamily CBRE currently has $18 billion of deals in the market, more than double our volumes sold in the first half of the year. Sales revenue fell 43% in EMEA and 11% in APAC, both in local currency. We are increasingly well positioned in APAC. Notably, revenue in Japan has increased by 16% in local currency year-to-date, and this has become our most profitable advisory market outside the U.S. In contrast with Capital Markets, leasing performed in line with our expectations with revenue down 16% versus 40% growth in the prior year second quarter. The leasing decline was driven by the Americas. Leasing revenue grew in overseas markets as combined APAC and EMEA increased 6% in local currency. Among property types in the U.S., office was weakest with revenue down 30%, while Industrial was down only 10% against the challenging prior year comparison. Loan servicing revenues declined 6% and due to significant prepayment fees in the prior year. Excluding prepayments, loan servicing revenue increased by 6%. Prepayment fees fell significantly beginning in the third quarter of last year, so the prepayment headwind should diminish going forward. Valuation revenue declined 6% in the quarter in local currency, largely driven by our U.S. business. In the U.S., we perform a significant volume of work for financial institutions. This business has slowed down this year as investors pulled back from investment into commercial real estate. Property management net revenue rose 5% in local currency, increasing across most geographies with notable strength in Continental Europe and Southeast Asia. Turning to our GWS business on Slide 7. Net revenue increased 13% and SOP grew by 7% in the quarter, slightly exceeding our expectations. Growth was driven by the continued strength of our local business in the UK and expansion into the U.S. and an enterprise FM clients where we increased both the scope and geographic reach of our services. Demand for project management services also remained strong, led by our Turner & Townsend business. SOP margins declined from the prior year second quarter due to higher OpEx investments to support our local businesses, continued geographic expansion as well as costs associated with integrating recent acquisitions. Even though we expect these investments to continue through the balance of the year, full year SOP should be slightly better than we expected with the margin in line with last year’s level. Our local business represents a tremendous growth opportunity, particularly in the U.S., which is expected to account for just 15% of this business lines net revenue this year. This business began with the Norland acquisition in late 2013. It has grown significantly from its original UK focus and net revenue is expected to grow by over 20% this year. Our pipeline remained elevated, more than 20% above the Q2 2022 level. The pipeline growth is driven by large first-generation outsourcers that are focused on lowering the real estate costs. Turning to our REI segment on Slide 8. As expected, SOP was down significantly versus the prior year when we generated a record SOP from this segment. Looking at the Investment Management business, nearly all of the operating profit decline was driven by lower incentive fees and modest co-investment losses versus co-investment gains in last year’s second quarter. Assets under management fell by 1% driven by lower market valuations. The foundation of our IM business, which earns base fees on core and core plus assets remains healthy, and we expect co-investment gains and incentive fees to return when broader commercial real estate market conditions improve. Turning to development. We realized a modest operating loss. As we have discussed before, it is important to look at this business over the long term versus any particular quarter. Our highly flexible financing structure allows us to hold on to completed assets if we believe they can yield better returns in the future. And we continually evaluate our portfolio with that in mind. On a trailing 12-month basis, we generated $92 million in development and operating profit compared to $544 million in the prior 12 months, a period of record performance. Due to anticipated asset monetizations in Q4 of this year, we expect higher operating profits for the full year than we realized over the trailing 12-month period. As Bob mentioned, investors have begun to selectively deploy capital into development, favoring well-located industrial and residential projects. Our pipeline increased slightly during the quarter, positioning us well for a market recovery. Please turn to Slide 9 for a discussion of capital management and our balance sheet. During the quarter, we raised $1 billion of capital through a senior unsecured bond offering and shortly after quarter end, we raised an additional $350 million from refinancing and upsizing our euro term loan. We now have even more capacity to invest while maintaining an investment-grade balance sheet. We have a robust M&A pipeline and are evaluating multiple opportunities in the range of $1 billion. We expect these investments, if completed, will drive meaningful shareholder value. We did not repurchase any shares in Q2, but have repurchased $100 million of shares month-to-date. Looking at free cash flow, we had originally expected to generate just over $1 billion in 2023. We now expect this figure to be closer to $600 million to $800 million for two main reasons. First, as noted, our expectation for earnings has declined, which has a direct impact to cash flow. Second, the cost of Trammell Crow Company developments that are consolidated on our balance sheet as well as broker recruitment costs run free cash flow. We are seeing attractive opportunities to make targeted investments in both land acquisitions for future development and broker recruiting, and we now anticipate investing more in these two areas versus our expectation last quarter. I’ll end with our updated outlook for 2023 on Slide 10. As Bob noted, we now expect core EPS to decline 20% to 25% from last year’s record level, greater than the low to mid-double-digit decline we previously discussed. Our original outlook anticipated a low teens decline in advisory SOP, a low double-digit increase in GWS SOP and a nearly 30% decline in REI SOP coming off a year when our development business produced $330 million of operating profit. The incremental decline in our revised outlook is primarily driven by our view that the capital markets will not recover until next year. As a result, we expect lower investment sales and loan origination revenue than we anticipated 90 days ago and an extended time line to realize gains both in development and investment management. Looking at each segment, we now expect advisory SOP to decline by approximately 20% for the full year, a greater decline than we had been anticipating. In GWS, we now expect SOP to reach over $1 billion for the year or low-to-mid double-digit growth, slightly better than we previously expected, with the margin on net revenue in line with 2022 level. In REI, we now expect full year SOP in the low $300 million range, reflecting a 35% to 40% decline slightly worse than we previously expected. The primary driver is lower than anticipated co-investment gains and incentive fees in investment management as well as fewer development gains. We expect core EPS in the second half to be heavily weighted to the fourth quarter. Beyond normal seasonality, we anticipate most development sales will take place in Q4, and the investments we’re making in the growth of the GWS business will have an increasing benefit through the second half of the year. As such, we expect the fourth quarter to represent nearly three quarters of second half core EPS. With that, operator, we’ll open the call for questions.

Steve Sakwa:

Thanks, good morning. Bob or Emma, I was just hoping you could spend a little time on the capital allocation. I guess no share buybacks was a bit surprising. I know you talked last quarter about looking at a number of M&A opportunities and maybe that was just the focus. But just any more color you could share on kind of why no buybacks despite, I guess, modest investment in the quarter. And it sounds like you have stepped that up already per the slide deck in Q3, but just some more color would be great.

Steve Sakwa:

Okay. Thanks. And then I guess just turning to the sales environment. It actually came in a little bit better than, I guess, what we had sort of feared or worried about. But I guess, Bob, I’m trying to figure out from your perspective, is it the actual level of rates that matters? Or is it just the fact that CMBS isn’t really open and functioning in a smooth way and the banks aren’t lending, I guess what do you ultimately need to see to really get the wheels grease to get the capital market business back? Is it the absolute level of rates? Or is it just people lending even at higher rates, but that there’s capital availability.

Steve Sakwa:

And just one last follow-up. Just if you had to think about 2024, I guess, you would assume that it’s probably more back half weighted in terms of just the volume and kind of the business activity. So sort of think about more second half 2024 than first half 2024.

Steve Sakwa:

Great. Thanks. That’s it for me.

Anthony Paolone:

Thanks, good morning. First one, following up on Steve’s discussion on capital allocation. It seemed like last quarter, you were pointing to a pretty sizable M&A deal that you had circled. Did that fall out of bed? Or is it still a potential transaction? Just wondering if you can give us some color there?

Anthony Paolone:

Okay. Did that temper though, just the amount of buyback to kind of keep capacity for some of these larger deals? Because I think if you look back over the last year or so, you’ve had some pretty strong buyback quarters. And so just trying to understand what to expect on that side?

Anthony Paolone:

Okay. Thanks. And then Emma, separately, you had mentioned some drags in GWS just the investments you’re making there and that those would persist for the rest of the year. Can you maybe give us some ideas to the order of magnitude and whether or not those are lifted then in 2024, where we see like a pickup?

Anthony Paolone:

Okay. And if I could just ask one more. You talked about some of the investments that affect free cash flow with people and recruiting and so forth. I guess just casually observing it does seem like there’s been a pickup of articles of people moving around. Can you just comment just generally on the landscape and kind of where the efforts may lie in terms of trying to recruit and retain folks right now?

Anthony Paolone:

Okay. Thank you.

Jade Rahmani:

Thank you very much. The debt issuance overall that you mentioned the term loan upsizing and also the senior notes. Was that to be incremental or a refinancing of debt? Is it to add that capacity to the company overall?

Jade Rahmani:

Thank you very much. On the cash flow performance side, cash flow was negative in the quarter. Just looking at the cash flow statement in the supplemental, one of the items was timing related due to the GSE multifamily business. I think proceeds from sale of mortgages were below the originations. The other big item looks to be in working capital on the payable side and also in receivables. Is that timing related? Was there anything outsized in the second quarter you wanted to call out?

Jade Rahmani:

Okay. So nothing unusual in working capital?

Jade Rahmani:

Okay. Post second quarter leasing, I recently heard that in New York City, in particular, there’s been a big uptick in office leasing, at least interest in certain buildings. Do you have any views on that?

Jade Rahmani:

Thanks. I’m going to get back in the queue. Appreciate it.

Stephen Sheldon:

Hey, good morning. Thanks for taking my questions. First one here, just any general updates on how you’re thinking about the cost structure. It sounds like you’re actually investing behind broker capacity maybe to be better positioned for recovery. Is that kind of a fair read through? And have you taken any notable incremental cost actions elsewhere relative to what you would have thought three months ago?

Stephen Sheldon:

Got it. That’s helpful. And then as a follow-up in development, I guess, there’s usually not a ton of visibility. But just how are you thinking about the potential monetization there heading into next year? Would you expect actual harvesting activity to maybe pick up later 2024, maybe 2025 once cap rates, et cetera, have hopefully become a little bit more favorable. Just curious what visibility you have there on the outlook and development.

Stephen Sheldon:

Great. Thank you.

Michael Griffin:

Great, thanks. Maybe just going back to the M&A pipeline and potential opportunities there. Just given your expected slowdown in the capital markets environment, do you expect more of these opportunities for M&A to be in the GWS segment or advisory or kind of any color on where you’re seeing acquisition opportunities?

Michael Griffin:

Great. And then just on the capital markets outlook. Has anything changed across the different regions? Maybe are you expecting a greater pickup in APAC relative to the Americas or – any kind of color you could give on the state of performance of the different regions would be helpful.

Michael Griffin:

Great. That’s it for me. Thanks.

Jade Rahmani:

Thank you. M&A is always a fascinating topic yet. I know you can’t say much. Can you say whether your focus is domestic or international?

Jade Rahmani:

I wanted to also ask about AI if that’s an area you want to invest in.

Jade Rahmani:

Thank you very much.

Patrick O’Shaughnessy:

Hey, good morning. The development in process pipeline ticked down a little bit in the second quarter, probably not a huge surprise. Given the current macro, would you expect that in-process pipeline to kind of be flattish for the next few quarters if it doesn’t really make sense to kick off new projects?

Patrick O’Shaughnessy:

Got it. Thank you. And then Hana – at least Hana segment overhead is now a net positive to operating income over the past 12 months. What are your updated expectations and outlook for that business?

Emma Giamartino:

And Patrick, I’ll add just a reminder that when we invest in Industrious, we actually sold our operations, the core of our operations from Hana to Industrious. And so it Industrious operates all those properties today.

Operator:

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to hand the call back to Bob Sulentic for closing remarks. Please go ahead, sir.

Operator:

Thank you, sir. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.

Brad Burke :

Good morning, everyone, and welcome to CBRE's first quarter 2023 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use all along with our prepared remarks and an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that today's presentation contains forward-looking statements, including, without limitation, statements concerning our earnings outlook. Forward-looking statements are predictions, projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I'm joined on today's call by Bob Sulentic, our President and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino :

Thank you, Bob. As Bob mentioned, the diversification of our business and rigorous financial discipline were key to producing Q1 results that were slightly better than the expectations we set forth for each of our segments in late February, despite some market environment becoming more challenging. I'll review each segment now, starting with Advisory Services on Slide 6. Results in the first quarter were supported by stability in our valuations, loan servicing and property management lines of business, with revenue relatively flat compared to prior year. We also benefited from cost mitigation efforts, we initiated last year that decreased advisory operating expenses by 2.5%. So these benefits were offset by a greater decline in our property sales business than expected. Capital markets, property sales and loan origination combined declined 40%, a slightly greater decline than expectations. Within property sales, all major reasons saw revenue decline with Asia-Pacific performing the best, down 30%, and the Americas falling more than 40%. Most sales activity today involves industrial and multifamily properties with office understandably drawing little capital activity. Significant capital is ready to be deployed, but we do not expect activity to improve until borrowing costs decline and market pricing clarity improved. Leasing revenue declined 8%, in line with expectations against the nearly 50% increase in the first quarter last year. Across geographies, leasing performance diverged, with the Americas down 10% and EMEA down 5% and APAC up 26%, all in local currency. This is consistent with our expectations for non-U.S. markets, especially APAC, to perform relatively better in light of regional economic outlooks and improved office utilization levels. Now please turn to Slide 7. Our GWS business continues to grow impressively with both facilities management and project management net revenue up by double digits, exceeding our expectations. Growth was driven by several of the large facilities management contract wins achieved last year and strong organic growth within project management, driven by large project mandates. Our pipeline of new business reached a record level at the end of the first quarter as both existing clients and first-generation outsourcers are increasingly focused on cost reduction. GWS's margin on net revenue of 10.8% was in line with our expectations and will improve throughout the year as our cost reduction efforts to phase in. Please turn to Slide 8. Overall, REI results met our expectations, and we continue to expect full year results to meet our original guidance. Q1 development results were supported by large asset sales, which occurred in January, consistent with what we discussed last quarter. For the balance of the year, we expect our asset sales to be heavily weighted to industrial projects such as monetized in the fourth quarter. We have pulled back only slightly on planned construction starts for 2023. We do anticipate that well-conceived projects we got in the current environment will come online in supply-constrained markets, most notably for industrial. For the same reason, we are focused on carefully building our land position so that we can benefit from a first-mover advantage coming out of the downturn, a position that has historically provided significant rewards. Additionally, our Telford UK development business is tracking in line with our expectations, and we continue to expect improvement from 2022 results. Within Investment Management, profit was roughly flat versus prior year, excluding the mark-to-market impact on our co-investment portfolio, which was a significant positive in the prior year. For context, co-investment gains made up less than 1% of this business line's operating profit in the trailing 12 months. AUM declined modestly from the fourth quarter as net capital inflows and foreign currency effects offset most of the loss of market value. Turning to Slide 9. We believe the current environment is an attractive time to deploy capital. Our M&A pipeline is strong with multiple attractive opportunities, some large that could transform CBRE's existing offerings and drive meaningful shareholder value. We reduced share repurchases in the quarter as we continue to evaluate these opportunities. If we are unable to convert our larger pursuits we will accelerate our share repurchase activity well above Q1 levels. In any event, we expect to deploy more capital in the next 12 months than in the prior 12 months while maintaining an appropriately conservative level of leverage. We expect to generate in excess of $1 billion of free cash flow this year. When combining this expected free cash flow with our lightly levered balance sheet, we could invest as much as $5.5 billion this year, while maintaining leverage below 2 turns. I'll conclude with our outlook. Our original 2023 outlook contemplated our recovery from the current downturn in the back half of the year. We now expect a delayed recovery due to more constrained debt liquidity and heightened market uncertainties. Our sales and leasing businesses are most impacted by the changed economic environment. And as a result, we now anticipate property sales to fall by nearly 20%, which would represent a more than 25% decline from peak 2021 levels. We also expect leasing activity to be down by high single digits this year. As Bob indicated, we are maintaining our full year outlook, with core earnings per share expected to decline by low- to mid-double digits this year. Stronger growth than we originally anticipated in our resilient lines of business described earlier and incremental cost reduction efforts will largely offset the impact of our weaker outlook for capital markets and leasing transactions. However, there is more uncertainty in this outlook than there was when we first presented it in late February. We continue to expect core EPS to exceed the prior peak in 2024. And as a reminder, our outlook is informed by our view that there will be a moderate recession this year, followed by a rebound in economic activity in 2024 as the Fed reduces interest rates. With that, operator, we'll open the line for questions.

Emma Giamartino :

Yeah, Chandni, so we are looking for opportunities across our segments where we can enhance the offerings that we currently have. And we are looking at multiple deals that are larger than what we've typically done. So on the larger side of both Turner & Townsend. And in terms of the segments that we're focused on, it's facilities management, it's investment management, and it's our resilient lines of business within advisory such as valuation. So we're looking across all three segments, and we are looking for, when we say transformational, it's needle moving something that can change the profile of our existing businesses. These aren't businesses that are completely new to CBRE. We have extremely high rating standards. As you can imagine, you asked about multiple across those three segments. The multiples are different, but we are looking for highly accretive deals that can generate returns and shareholder value well above what we could do with buybacks alone. And I do want to underscore that M&A can move in multiple directions, and we are hopeful that we'll convert at least a large deal in our pipeline. But if we don't do that, we will accelerate our share repurchases. And as I said in my remarks, we intend to deploy as much capital as we -- in the next 12 months as we did in the last 12 months. And as a reminder, that was just over $2 billion of capital deployed.

Emma Giamartino :

It is not. It is not. And what I'd say about that is both buybacks and M&A done towards the end of the year will not have a meaningful impact to 2023 results. That impact will flow into 2024.

Emma Giamartino :

So Chandni, that's actually a really important question. I'd say, high level, the reduction from our revised on the ground sales and leasing revenue is having about a 3% impact to our far outlook for EPS for the full year, and that is being offset by a combination of higher growth in GWS and cost mitigation efforts or cost avoidance efforts in REI and advisory.

Operator:

Thank you. Now our question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Bob Sulentic :

Steve, it's both of those things. It's the absolute rates, it's the availability of credit, but it's a third thing, and that is the uncertainty about where things are going to go. And we think later this year, all three of those things will start to move in a direction that's helpful to our business. We think rates will stabilize, possibly come down more capital more debt and equity will become available. And the combination of those two things will create more certainty around pricing, and we think that transactions will start to happen again on the capital market side.

Bob Sulentic :

We talked about that at the end of the year, which, by the way, that was only 60 days ago, roughly. And our long-term view is not altered by what we've seen so far this year. Of course, we'll address that again next year when we have the benefit of the full year view. But our long-term view for the prospects of the business are good. And of course, part of those -- the long term is the short term, I will say what we've seen in the short term is challenged in one sense, the transactions, but in the other sense, our enthusiasm for and belief in these -- what we're calling these resilient businesses, particularly GWS. And also what we're seeing in the M&A space where we have become a more interesting buyer to a good number of companies than we have been historically. There are companies out there in our sector or directly adjacent to our sector that believe by becoming part of our business or having financial sponsorship from our business will help them perform better than they could perform on their own. And this is not a circumstance that's going on in the same way with other companies in our sector. We think we have a distinct advantage there. And that's going to be a more material part of our future, we believe now that you would have heard from us certainly in the past.

Operator:

Thank you. Our next question is from Anthony Paolone with JPMorgan. Please proceed with your question.

Bob Sulentic :

Well, there'll be shifts across all of those. So by geography, our business is definitively becoming larger on a relative basis in Asia-Pacific, Asia specifically than it has been historically. I'll give you an example. In the advisory business, forever, our second biggest business was the UK behind the United States, and there wasn't anything close. Our business in Japan now is roughly the same size as our business in the UK. For sure, we're growing our businesses related to the multifamily and industrial asset classes. We're not the only ones doing that, but that's a definitive part of what we're doing. And then the outsourcing business, which includes us providing facilities management and project management and portfolio services work, mostly for big corporates focused on saving them money, working on their net zero initiatives, shedding assets in some cases. That business will be an enduring double-digit grower and probably not low double digits. We think there's an opportunity to have that be mid-double digits. And when I made my comments a minute ago about companies being increasingly interested in having us be their acquirer or us investing in them, a lot of that happens in that segment. So that's kind of where we see the shift happening across our businesses.

Bob Sulentic :

Yeah, retail leasing is good. And by the way, retail rental rates are growing up because there's a big experience thing going on here across the U.S. and around the world that is causing retailers of various types, including food and beverage. But obviously, the high-end retailers doing quite well, and that's helping our leasing business in retail. Industrial's been white hot over the last couple of years, and it's just not going to stay that hot indefinitely. That's been a little bit anomalistic. And so we are seeing a little bit of downward pressure on industrial leasing. But we think over the longer term, industrial leasing will be very, very strong. And the dynamics driving logistics space around the world will remain in place. But we are seeing some downward pressure on that for sure this year.

Operator:

Thank you. Our next question is from Jade Rahmani with KBW. Please proceed with your question.

Bob Sulentic :

In aggregate, Jade, I don't think so. And I'll tell you why I say that. First of all, what you're seeing now isn't driven largely by commercial real estate being out of favor. It's not even in the biggest sense being driven by office buildings being out of favor. It's being driven by the denominator effect. The base of assets around the world is growing. The base of industrial space around the world is growing. The base of institutional quality multifamily around the world is growing, et cetera. And we think that's going to continue. And we think when stock prices rebound, the denominator effect will go in the other direction. The other thing I would tell you about office space, which has been a big home for capital, there's a tendency when things turn to think that they're going to turn and disappear. Our view is that the portfolios that companies have the office space, not the investors in office space, but the companies that use it that ultimately drive the investment in office space will shrink materially. But it will still be an enormous asset class. If it's down 20% or 10% or 15%, whatever it settles down, it will still be an enormous asset class. And the future of office space is still being sorted out. We may be more back in the office in the future than we are today. That's just an unknown. But that will be a very large asset class. That will be a very big home for institutional capital in the future, but certainly, other asset classes will and there's all retail and industrial, hotels, multifamily, huge asset classes and look what's going on with hotels. I mean try to get a hotel room at a rational pre-COVID rate right now anywhere in a good hotel and that you just can't do it. And so I don't think commercial real estate as an asset class is going to decline in importance at all in the future.

Bob Sulentic :

Jade, there's two areas of our business now where we do meaningful work in infrastructure. We have an investment management business that invests in infrastructure. And with the acquisition of 60% of Turner & Townsend, which by the way, has continued to outperform our expectations. They have a significant infrastructure and significant green energy business, and they do large projects subject to very long-term contracts around the world. We would expect those businesses to grow and provide incremental opportunity to us in the long run. What we might do beyond that is a long run circumstance that we're not really prepared to talk about at this point, but we do have positive exposure in both those areas.

Operator:

Our next question is from Michael Griffin with Citi. Please proceed with your question.

Bob Sulentic :

Yeah, Michael. What I said was that we expect the total of our cyclically resilient business is to grow in the high single digits. So that would be GWS valuations, property management the fee portion of our investment management business, we expect our GWS business to grow well into the double digits.

Bob Sulentic :

Yeah. Well, trophy buildings both in the current environment and in the long term are going to do quite well in our view. Because with all that's going on, on the return to the office circumstance, companies are looking for great environments for their employees. We're doing it for our own headquarters in our own offices around the U.S. and around the world. Virtually, all of our clients are doing it. And these -- so these great buildings are going to do well. B and C buildings are going to be challenged, and there is less capital available for them. But I think there's an overreaction to that circumstance. The press -- it's like so many things. It's a great story to talk about how bad something is when it gets bad, the fact of the matter is, coming out of the financial crisis, office buildings were capitalized much more conservatively than they had been historically, more equity in office buildings than there had been previously. If you look at the banking system today, something like 1.5% of commercial or commercial banks asset portfolio is in office buildings. It's not a huge threatening circumstance. Some of the problem assets will go back to the bank. Some of them will get restructured and worked out as is always the case with troubled assets. So it's going to be hard to refinance some of those assets and some of those assets are going to become troubled and go back. But it's not going to be an overwhelming circumstance the way certain headlines would suggest it might be.

Emma Giamartino :

Michael, I just want to clarify, our Telford business is a multifamily business, it's shifting towards build-to-rent multifamily.

Emma Giamartino :

No, no. We don't have any concerns. And we actually see -- when we initially made that investment, we saw a secular tailwind in builder in the UK that continues to exist. And so we expect that business to continue to grow going forward.

Bob Sulentic :

Thank you.

Stephen Sheldon :

Hey, good morning. Thanks for taking my questions. Really impressive trends. GWS this quarter sounds like there is confidence in continued double-digit growth there. In that context, I think there has been at least some concern that with companies reducing their office real estate footprint that it could become a headwind to growth in GWS at some point if contract scopes get reduced. So be curious if you're concerned about that at all? Or is the business so diversified by different asset classes and the industry still so fragmented and so early in outsourcing adoption that you're not worried about the growth trajectory at GWS over the medium term. I guess how do you think about that?

Stephen Sheldon :

Very helpful. And then just a follow-up. You've given some good detail on the 2024 kind of commentary. But on 2024 core EPS surpassing the prior peak, which is 2022. Is the planned capital deployment a big factor in that, whether it's accretive M&A or share repurchase activity? Or would you still expect to surpass prior peak in 2024 without a big ramp in capital deployment?

Stephen Sheldon :

Great. Thank you.

Patrick O'Shaughnessy :

Hey, good morning. So obviously, debt financing is really challenging right now in commercial real estate. What sort of role do you see for private credit in commercial real estate financing going forward?

Patrick O'Shaughnessy :

Got it. Thank you. And then you spoke earlier about market pricing clarity serving as a catalyst for improved capital markets transactions. But what's the catalyst for that market pricing clarity to actually happen?

Patrick O'Shaughnessy :

Great, thank you.

Bob Sulentic :

Thanks, everyone, for joining us, and we look forward to talking to you again a quarter from now when we report our second quarter results.

Brad Burke:

Good morning everyone and welcome to CBRE’s fourth quarter 2022 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks, and an Excel file that contains additional supplemental materials. Before we kick off today’s call, I’ll remind you that today’s presentation contains forward-looking statements, including without limitation statements concerning our earnings outlook. Forward-looking statements are predictions, projections, or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning’s earnings release and our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I’m joined on today’s call by Bob Sulentic, our President and CEO, and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino:

Thank you Bob. Before turning to our 2023 outlook, I’ll first discuss fourth quarter results for each of our segments, starting with advisory on Slide 6. Advisory net revenue and SOPs declined by 21% and 33% respectively, driven by a slightly more pronounced decline in our higher margin transactional businesses than originally expected which was partially offset by healthy growth from our property management business. For capital markets, sales and mortgage origination combined revenue declined by 46%, in line with our expectations. Capital markets revenue growth was robust in last year’s Q4, increasing by 53%, which accentuated the extent of this year’s decline. Leasing revenue was down 7% both globally and in the Americas, a slightly bigger decline than we expected with a notable slowdown in office activity in New York, Boston, San Francisco and Seattle. In total, global office leasing revenue was 14% below prior year after increasing by nearly 50% year to date through the third quarter, albeit against relatively easy prior year comparisons. Outside the U.S., leasing revenue was down 6% wholly due to FX translation headwinds. In local currency, lease revenue increased in both EMEA and Asia Pacific. The 19% decline in loan servicing was attributable to fewer prepayments amid rising mortgage rates versus record prepayments in Q4 2021. Excluding prepayments, loan servicing revenue increased by 2%. Overall cost in advisory declined by 18%, but this was not enough to offset the 21% decrease in total new revenue. Turning to Slide 7, GWS net revenue grew by 13% with half of that increase coming from organic revenue growth. In local currency, net revenue excluding Turner & Townsend increased by 12% with facilities management up 9% and project management up 21%. GWS SOP increased by 30% with margin improvement driven partly by business mix. Turner & Townsend continued to grow impressively. In the first full year since acquiring a 60% interest, Turner & Townsend has exceeded our original underwriting. 2022 represented our highest ever year for client contracts coming up for renewal, totaling over $4 billion. GWS renewed 94% of this total, often with increased scope of our client relationships. Looking forward, we expect 2023 renewals to be just over half the level of 2022. The GWS revenue pipeline ended the year up 11% over year-end 2021, reflecting continued demand from first generation and outsourcing clients as well as expansion mandates from our existing client base. Turning to Slide 8, REI SOP declined to just $17 million in Q4 against an unusually strong prior year comparison. Our global development business posted a $6 million SOP loss primarily due to a $43 million loss in our Telford, U.K. development business. Lower SOP in U.S. development reflects the timing of assets dispositions, which were heavily weighted to this year’s first half, consistent with our expectations going into the year. Following an in-depth review of the Telford business, we wrote down a handful of projects where we expect costs to exceed our initial underwriting, and we also increased our fire safety reserve. We now believe Telford financial performance will improve going forward. Investment management AUM grew $5 billion sequentially, driven by net capital inflows of $4 billion and positive FX movements which offset $5 billion of mark-to-market declines. Investment management SOPs declined due in part to co-investment losses versus a gain in the prior year quarter. Excluding co-investment gains and losses, investment management SOP was nearly flat with the prior year quarter. Turning to Slide 9, our 2023 outlook is underpinned by the following macroeconomic assumptions. The U.S. will experience a short, moderate recession in 2023, unemployment will increase to near 5%, inflation will end the year above the Fed’s 2% target but clearly trending down, and 10-year U.S. treasury yields will end the year under 3.5%. Should the economic outlook change from this base case, our business outlook would also change. In our advisory segment, we expect a mid single digit revenue decline. This will be driven by growth in more resilient lines of business offset by a mid to high single digit decline in leasing and mid-teens decline in property sales. We expect SOP to decline by high single digits to low double digits as cost savings initiatives partially offset both relatively better growth in lower margin businesses and general cost inflation. In our property sales business, we expect the number of transactions will be subdued in the first half of the year and accelerate in the back half of the year. We expect our leasing business to continue to benefit from an elevated level of lease expirations. While the return to office has been slow in the U.S., EMEA and APAC have seen occupancy return at a faster pace. As a result, we expect these regions to be less pressed than the Americas in 2023. For property management and valuations, we expect accelerating revenue growth in both kinds of business due to recent investments in sales support and tuck-in acquisitions, as well as less FX pressure. Within GWS, we expect low double digit new revenue and SOP growth with margins increasing slightly as cost savings more than offset inflation and incremental investment to support growth. Our facilities management business is benefiting from new wins and expansions. All major client sectors are expected to grow, notably in healthcare and technology where the changing use of real estate is driving increased demand for outsourcing services that we believe CBRE is best positioned to deliver. We also expect continued momentum in our project management businesses, including double digit top and bottom line growth from our Turner & Townsend business. Within our REI segment, we expect SOP in the mid $300 million range with roughly equal contributions from development and investment management. Within our TCC development business, we expect SOP of just over 1% of our nearly $17 billion in-process portfolio, and we’ve closed over $100 million of expected SOP in January alone. Our TCC business has developed a portfolio of assets that we believe is extremely well positioned for the current market environment with approximately 75% of our expected SOP in 2023 from industrial deals. While our Telford business remains challenged, we do expect improvement versus 2022 as significant cost inflation is now incorporated into projected results, adding approximately $20 million to SOP versus 2022. Beyond our three main business segments, we also expect roughly flat corporate overhead and our full year core tax rate to rise to 2021 levels versus a lower 2022 rate. Consistent with our approach last year, the 2023 outlook assumes only a modest use of capital. That said, we continue to have a strong appetite for M&A and share repurchase, both of which could support incremental earnings growth above our current outlook, and we do not anticipate ending 2023 in a net cash position. In summary, we expect core EBITDA to decline by high single digits versus 2022 with over half attributable to the decline in development SOP. We expect core EPS to decline by low to mid double digits versus 2022. This is more than the core EBITDA decline because of higher depreciation and amortization and a higher tax rate than in 2022, when we had a number of one-time benefits that will not recur. Lastly, we expect nearly two-thirds of full year core EPS in the back half of the year, a more pronounced seasonality to earnings than we historically experienced. The $400 million cost containment program we announced last quarter is embedded in our guidance. Fourth quarter results saw a nearly $80 million cost benefit and we expect a cost benefit in 2023 of approximately $300 million, with the remainder in 2024. The entirety of the cost containment program will be reflected in our run rate by the end of this year. We expect that our cost containment efforts will allow us to counteract the general inflation pressures and enable us to make continued investments to support future growth. Last year, we refreshed our 2025 financial guidance which implied CBRE would achieve core EPS between $8 and $9 by year-end 2025, absent meaningful capital allocation. Due to the real estate transaction downturn, our target is now likely to slip by 12 to 18 months. As I noted previously, our 2025 targets were established on the basis that there would not be a recession following the COVID recovery. The drivers of how we achieve this core EPS growth are largely unchanged. At the midpoint of that core EPS target, $8.50, CBRE will have achieved double digit compound core EPS growth since 2019 despite needing to manage through two significant downturns. It also represents a high teens CAGR from our 2023 projection. In closing, we remain excited about CBRE’s prospects for long term growth, the strength of our brand, and our ability to outperform during periods of market weakness. With that, Operator, we’ll open the line for questions.

Anthony Paolone:

Thank you and good morning. My first question relates to GWS and the outsourcing business, and I was wondering if you can maybe take us inside that business a bit more and help us understand how in an environment where office usage is down and footprints are shrinking, that that business can continue to grow. Just would like to better understand what additional services clients are taking on to maybe offset smaller footprints.

Anthony Paolone:

Okay, and then just my second question relates to just perhaps any color you can give us that you’re seeing on the ground today in terms of either greenshoots or regions or property types where you’re starting to see activity levels rebound. I think you alluded to some properties starting to come to market or folks maybe testing the market a bit, and so just wonder if you could elaborate on that some.

Anthony Paolone:

And leasing, just the more transactional stuff.

Anthony Paolone:

Okay, thank you.

Chandni Luthra:

Hi, good morning. Thank you for taking my questions. Bob, you talked about 2024 EPS recovering to 2022 levels at least. What gives you confidence on such a recovery, just given the macro environment and the uncertain outlook that we all have at the moment for the rest of the year? Are you seeing any signs on the ground of improvement, anything that gives you that confidence to go out and talk about 2024 right now?

Emma Giamartino:

Yes, to put a little context around what those numbers look like, Chandni, if you think about our resilient lines of businesses, we’ve talked about that being 40% contributor to our SOP. In 2022, it was 45% of our SOP; in 2023, it’s going to be closer to 50% to 55% of our SOP, and those are our lines of business that we expect to continue to grow through a recession, so that’s becoming a larger and larger part of our business. Then our transactional business lines, we expect them to rebound starting a little bit the end of 2023 into 2024, and what’s important to know about that is the growth that’s embedded in that outlook to get back to above 2022 levels means that our advisory lines of business, our transactional lines of business would need to grow less than they did in 2021. Putting that all together, it’s very achievable. Then on top of that, what’s not embedded in the 2024 guidance or our outlook is any sort of material capital allocation or M&A, which would put us far above 2022 levels.

Emma Giamartino:

Sure. When we look at allocating capital, we look at buybacks and M&A and are weighing which is a better use of our capital and which can drive a greater long term return for us. In 2022, you saw there wasn’t a significant amount of M&A opportunities, but obviously we’re building our pipeline and continue to build our pipeline and are seeing things--conversations are starting to build and accelerate in a way that they did not in 2022. But because there wasn’t a tremendous amount of M&A activity available, we repurchased almost $2 billion worth of shares and our share price was also at an attractive valuation, so we’ll continue to look at that. We are constantly evaluating whether we’re going to buy back or we’re going to do a larger transformational acquisition, and we’ll continue to do that throughout this year and we’ll update you as that progresses; but in our outlook, we didn’t include what that would look like because we don’t know how it’s going to unfold going forward. In terms of M&A, we are willing to go up to two times leverage for a transformational deal. If it was highly transformational, we’d go slightly above that, but that’s the range that we’re looking at. Then with capital allocation overall, we want to, at the very least, end the year net leverage neutral, but we’re willing to go above that for buybacks as well.

Operator:

Thank you. Our next question is from the line of Steve Sakwa with Evercore ISI. Please go ahead.

Bob Sulentic:

I think probably right now, it’s the stabilization of rates. The other thing, Steve, that I think is going on is people are recognizing that with all the concerns about the economy, and obviously there are considerable concerns, the fundamentals in industrial and multi-family are really strong - really low vacancy rates, every reason in the world to believe that rental rates will go up at least somewhat, and that’s in what’s going to be a tough year and then longer term, it’s going to be better. Then you have this just very human thing about sellers being ready to sell and buyers being ready to buy with capital and sitting on the sidelines for a long time. As soon as two or three circumstances start to line up favorably - fundamentals, stabilization of rents or rates, rates coming down a little bit, some talk in the market that maybe the recession won’t be as bad as we thought. When you get that confluence of circumstances, things start to shake loose a little bit, and as soon as one or two buyers go into the market, others start to get into the market because they’re afraid they’ll be left behind.

Emma Giamartino:

Yes, absolutely. I do want to step back, and there’s two major things going on that are different. The first is the U.K. put in a fire safety act which is still under review, related to a very terrible fire that happened in 2017, so through that act, they’re requiring all home builders who have built a building over a certain size over the past 30 years to bring those buildings up to the current fire safety standard, so as a result, we and all other homebuilders in the U.K. are having to go through this process of determining what the cost will be across all of our buildings that we’ve built over the next five, 10 years, as long as it takes us to remediate those issues, and that’s where you see the non-cash, about $140 million reserve that we took in Q4. What’s important to know about that is that is our best estimate of what we think the cost will be to remediate those, but the actual cash outflow to remediate those issues across those buildings will be over a very long period of time, so we view that as an isolated, anomalous issue that’s occurring across all homebuilders in the U.K. The second piece is how the operations of our business are being impacted, and that’s primarily related to the external environment, record cost inflation, we had a number of COVID slowdowns that we’ve talked about over the past numbers of years within Telford specifically, so what we did in Q4 is we evaluated all of our projects, you saw that we impaired a number of assets and we took a $43 million loss in Q4 - for the full year, it was just shy of $50 million, and we believe that that’s contained, that that’s a very good estimate of the value of those assets going forward and that we’re at an inflection point going forward, and we expect under new leadership and with the tailwinds behind U.K. build-to-rent, that that business will continue to grow going forward.

Bob Sulentic:

A little bit, Steve. You know, we still have the economic circumstance that we have with high interest rates, with concerns about the economy that’s causing people to not spend the way they would spend normally, so that’s a little bit of downward pressure on the business, but we’re encouraged by what we see in terms of the longer term trend.

Operator:

Thank you. Our next question is from the line of Michael Griffin with Citi. Please go ahead.

Bob Sulentic:

Okay. Emma, why don’t you--do you have that number, the percentage of our leasing that comes from office?

Bob Sulentic:

Yes, so Michael, what I’d say is our current assumption is that this downward pressure that we’ve seen on office leasing is going to sustain for the time being. We haven’t seen much change over the last few months in the return to office. We’ve built a plan for the next several years that assumes that that is going to be the case. We assume that there’s going to be a move over time from lesser quality to better quality assets, higher rates, higher rental rates, which will be a positive impact on the business, but definitely going forward we expect more of our income stream in the leasing business to come from industrial relative to office than it has--other than in last year, than it has in the longer term past, and we don’t see that changing. The comments that Emma made about our plan for the next several years, our growth plan, fully incorporate that view.

Bob Sulentic:

Well first of all, we are now not expecting a recession in Europe, and we expect Europe to trend better than the U.S. in terms of return to the office. Then you go to Asia, and we expect Asia to be almost like it was historically as it relates to return to the office, and we have very strong businesses particularly in Korea, Japan and China relative to what we’ve had historically and relative to our competition. We have a very strong business in Japan and we expect that business--it’s become quite large for us and we expect it to continue to grow. You have the economic backdrop that’s positive, relatively speaking, and then you have the circumstance related to return to the office that’s positive, relatively speaking, as you move from the U.S. to Europe to Asia, and then you have just the very strong relative business position that we have, particularly in Asia but also our businesses in Europe and the U.K. have gotten much stronger over the past few years on a relative basis, so you see all those things coming through.

Operator:

Thank you. Our next question is from the line of Jade Rahmani with KBW. Please go ahead.

Bob Sulentic:

I don’t think it’s had a major impact, Jade. Everybody is in the--of the mindset that things are going to be uncertain for a while. I don’t think the view as to how the year is going to play out has changed in any significant way. It certainly hasn’t for us. Our view continues to be that we’re going to have a relatively mild recession, that we’re going to be out of it toward the end of the year, early next year, and that the capital markets are going to come back in the back half of the year, and we’ve already walked through what we’re seeing anecdotally. We are definitively seeing positive anecdotal signs. We don’t want to over-rotate in terms of extrapolating too much from those anecdotal signs, but we think we’ll see more of that in the back half of the year.

Emma Giamartino:

Jade, I’ll walk through development first and then our investment management business. On the development side, any impairments, and we don’t think there should be significantly more this year, are embedded in our guidance for that segment, and as I noted in my remarks, we’ve already generated $100 million of SOPs in January alone in our development business, so we feel pretty confident in how the development business will pan out for this year. On the investment management side, what we’re expecting is slightly positive net flows for this year, so $5 billion primarily from our listed mandates and then also from infrastructure, and from our opportunistic funds to a lesser extent, and then we’re also embedding a slight decrease in the market value of that AUM which will offset some of those net inflows.

Emma Giamartino:

Yes, and it’s primarily capital markets that we’re really expecting to pick up, mostly in Q4. Just to give, Jade, a little context around that, if our sales revenue comes in 5% lower than what we’re expecting, for the full year that would have about a $0.02 EPS impact. Then on the leasing side, we’re not relying on a massive rebound at the end of the year, but obviously we’re guiding towards less of a decline in leasing for the full year. For leasing, if there’s a 5% decline in revenue versus what we’re expecting right now, that would have more like a 3% change to EPS, and on the sales side, I meant 2% change to EPS.

Bob Sulentic:

Well, we have--Jade, we have multiple places that we play in the office sector, so starting with development, we develop it, we manage it, we sell it, we finance it. We’ve sized our business and our capital allocation strategy consistent with the assumptions that we’ve talked about here today, about where that business is going to be. The other place we play in the office sector is in our investment in Industrious. We think Industrious is going to continue to grow at a healthy clip. It’s a really good offering with a really strong leadership team, and we are looking at that to be likely a bigger part of our business going forward. But we expect leasing to be as we described. We don’t expect to do much development, although we’ll do some development on build-to-suits - that will continue to be part of our business, and that’s great business when you can do office build-to-suits with credit tenants, and that’s what we would do. Then over time--there’s all kinds of uncertainty about what’s going to happen in the financing markets, but over time there will be a good amount of financing work in the office space as well.

Operator:

Thank you. Our next question is from the line of Patrick O’Shaughnessy with Raymond James. Please go ahead.

Emma Giamartino:

Yes, so we expect it to be roughly in line with where we were in 2022, which was about 75% free cash flow conversion. What’s important to note about that is because we’re in somewhat of a--we are in a declining market, there is inconsistency in timing in terms of how we accrue our bonuses and how we pay them out in cash. If you normalize for that timing in 2023, our free cash flow conversion is closer to mid-80s, which is where we want to be long term, so we should expect coming into 2024 that we should hit a more normalized growth environment in that mid-80% free cash flow conversion range.

Bob Sulentic:

This is the kind of environment that generally plays well for CBRE. When times are uncertain, it’s harder to generate commissions on either leases or sales or financing opportunities. Brokers tend to want to go to a platform that’s more likely to support them, so better information, bigger base of clients, better brand, a company that can be well positioned to invest in a downturn because they have a strong balance sheet. We’re going to generate a lot of cash in 2023 and 2024, and the brokers that pay attention, the more sophisticated brokers know that and they know we’ll be able to continue to invest in our business. It helps us retain and it helps us recruit, and Jack Durburg and the advisory team had a big year of recruiting last year and we’re expecting that to play out the same way this year.

Emma Giamartino:

Our in-process, just to frame what our in-process is, that is projects that have either started construction or we own the land and it is expected to start construction within 12 months. The decline was primarily driven by projects in that latter category that we now believe are going to be more than 12 months off, and so they’ve been moved into the pipeline category. We’ll continue to evaluate our in-process portfolio, but if things move out of in-process at this point, again it’s projects that won’t be starting for more than 12 months, it will not impact 2023. It would have an impact to 2024 and beyond.

Operator:

Thank you. As there are no further questions at this time, I would like to turn the floor back over to Bob Sulentic for closing comments.

Operator:

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Brad Burke:

Good morning, everyone and welcome to CBER's third quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, CBRE.com. There you will also find a presentation deck that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that our presentation contains forward looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's, future growth prospects, including our 2022 outlook, operations, market share, capital deployment strategy, investments and share repurchases, financial performance, foreign exchange impacts, cost management, the business environment, and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q respectively. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I am joined on today's call by Bob Sulentic, our President and CEO, and Emma Giamartino, our Chief Financial and Investment Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino:

Thank you, Bob. As Bob noted, global economic sentiment has deteriorated since our last quarterly update. More specifically, and as you've all been following closely, since we last reported, the 10-year treasury rate has spiked 140 basis points, the S&P 500 has declined by 7% and public rate prices have fallen by 16%. The futures market is now indicating that the Federal Reserve will raise rates more steeply and ease them less quickly, resulting in a harsher and longer downturn than when we last reported. It is worth reiterating that this has all happened in just the last 90 days. This more negative backdrop began to impact our business late in the third quarter, and there will be more impacts in the fourth quarter. CBRE's core EPS fell 19% from the prior year to $1.13. And as Bob noted, the drivers were weakening capital market conditions, the timing of development asset sales and a foreign currency headwind. Our results were, however, supported by the continued growth in the lines of business that, as Bob noted earlier, we see as cyclically resilient or secularly favored. Net revenue from these businesses collectively increased 12% in local currency, excluding the contribution from Turner & Townsend, and 24% in local currency, including Turner & Townsend, $284 million of net revenue in Q3. Finally, our GAAP EPS grew by 7% in the quarter due to a $183 million mark-to-market gain on our investment in Altus Power, which continues to benefit from demand for renewable energy solutions and its synergy with our CBRE businesses. I'll discuss results for each business segment, starting with advisory on Slide 6. Total advisory revenue rose 1% in the quarter or 5% in local currency, though performance diverged across business lines. Capital markets weakness emerged immediately following Labor Day, which historically has been a time of heightened sales activity. The decline was most pronounced in our Americas region, where property sales revenue fell 16% during the quarter. While Americas Capital Markets revenue, which includes sales and debt origination was relatively flat for July and August, September revenue fell by 43%. Outside the Americas, property sales rose 3% or 17% in local currency for the quarter. The decline in US property sales reflects sharply reduced credit availability. Typically, credit spreads have tightened as rates rise. However, higher rates have been accompanied over the past few months by credit spread expansion. Many capital sources have tightened underwriting standards considerably and set pricing at levels that are uneconomical for borrowers. Against this backdrop, our mortgage origination revenue declined by 28% versus last year's Q3, while the value of loans originated fell 34%. Revenue declined less than loan volumes because more financing in the quarter came from the government-sponsored enterprises, which we had expected to occur during periods of market weakness. The decline in credit availability was broad-based, with only regional banks lending more than in last year's Q3. Difficult comparisons further impacted year-over-year growth. Our combined property sales and debt origination businesses grew by 79% in last year's third quarter, driven by a resurgence of activity following the brief 2020 recession. We were encouraged to see our leasing revenue increased 14% or 17% in local currency, driven by large office and industrial transactions in major markets. Globally, leasing revenue increased across all major property types, with office growing mid-teens off a low base and industrial up high single digits. Property management, valuation and loan servicing all proved to be resilient as expected, collectively realizing net revenue growth of 2% or 8% in local currency. Advisory Services segment operating profit declined by 19% or 15% in local currency. Overall, advisory margins on net revenue declined by 4.2 percentage points, including the decline in loan origination-related OMSRs. Slide 7 illustrates the drivers of advisory's lower margin versus prior year. Just over half the decline in Advisory segment, operating profit margin is attributable to higher cost of services. with advisory gross margins declining 2.2 percentage points year-over-year or 1.9%, excluding OMSRs. Approximately 80 basis points of the gross margin decline is due to higher broker commissions. Strong growth in the front half of the year resulted in an outsized number of brokers achieving higher splits earlier than we've seen historically. This will also impact the fourth quarter, albeit to a lesser degree, before the annual recent next year. For context, approximately 1/3 of our U.S. brokers had historically reached higher tranches by the third quarter. For 2022, the percentage of U.S. brokers reaching higher tranches is almost 50%. It is important to note that our average commission expense naturally increases during strong years and declines during soft years. For example, in 2020, only 1/4 of producers had reached a higher tranche by the third quarter. The remainder of the gross margin decline is due to investments to support growth, broker recruitment costs and revenue mix as revenue erosion with steepest in debt originations, our highest margin line of business. Additionally, advisory operating expenses increased by $47 million or 10%, with the majority of the increase due to hiring that occurred in late 2021 or early 2022 as we prepared for a more robust growth environment and higher employee compensation reflecting a tight labor market. While we have and will continue to invest in target areas of growth in our business, we've also undertaken an equally targeted cost-cutting program, which I'll discuss shortly. While we began reducing operating expenditures during the third quarter, which shows the lowest year-over-year growth in OpEx since Q1 2021, only a fraction of our cost-cutting program was implemented during Q3, and thus did not fully reflect the impact of those reductions. We expect our cost programs to result in a single-digit year-over-year decline in Advisory segment OpEx in the fourth quarter. On Slide 8, our GWS segment posted strong net revenue growth of 8% or 13% in local currency, excluding the contribution from Turner & Townsend, and 32% in local currency, including the contribution from Turner & Townsend. Both Facilities Management and Project Management net revenue grew organically by double digits in local currency. We also remain pleased with Turner & Townsend, which is performing in line with expectations. Facilities management growth was supported by significant expansion work on our existing client base, particularly with technology clients. And project management growth was driven by Phase II designs and fit-outs, often tied to our clients' changing use of office space. Our GWS new business pipeline is on pace to end the year above the prior year's fourth quarter, with the opportunities coming from new and existing clients across a range of industries. GWS' segment operating profit margin on net revenue was 11%, excluding the impact of Turner & Townsend, down from an unusually strong third quarter of last year. The 11% margin represents a sequential improvement and was in line with our expectations as margins continue to normalize from COVID-related highs. Turning to our REI segment on Slide 9. Segment operating profit of $59 million represents an $88 million decline from the prior year. You'll remember last quarter, we told you 75% of the REI segment's total operating profit will be realized in the first half of the year due to the cadence of our development asset sales. The segment operating profit decline is predominantly due to this anticipated deal timing. Within REI, Investment Management realized operating profit of $44 million, down 12% from last year. In local currency, the decline was 4%. Beyond FX, prior quarter results were bolstered by an $11 million positive mark-to-market on our $335 million co-investment portfolio versus negligible mark-to-market in the current quarter. The overall decline as continued growth of asset management fees, which increased by 19% in local currency, even though adverse currency movement reduced AUM to $143.9 billion. Our development business realized $17 million of operating profit against $100 million in the prior year, reflecting fewer asset sales during the third quarter. While we expected most of this decline when we provided our last quarterly update, we elected to pause on selling certain assets as we wait for capital market sentiment to improve. And as we noted last quarter, our development business utilizes highly flexible financing, which enables us to monetize assets when market conditions are accommodating and to pause when appropriate. Please turn to Slide 10. While we can't dictate the macroeconomic environment, we can control our costs and how we allocate our capital. We are targeting over $400 million of cost reductions due to management actions. This is in addition to the naturally flexible cost reductions when business declines, such as discretionary bonuses, incentive compensation, profit sharing and commissions. As discussed last quarter, CBRE can ramp up cost reduction activities as market conditions necessitate. Our current cost reduction program is driven by our base economic assumptions, which, as we've discussed, envision a more challenging economy than we communicated last quarter. Approximately $300 million of targeted cost reductions will be permanent in nature, with the vast majority coming from headcount reductions. Beyond headcount reductions, we also anticipate permanent reductions to our cost basis for third-party and occupancy spending. The balance of the savings, approximately $100 million, is more temporary in nature, but we will continue that until market conditions have improved. These cost savings will come from reduced travel and entertainment, promotion and marketing spending and reductions to discretionary compensation plan. And to be clear, the planned reductions to discretionary compensation are above and beyond the natural flexibility of these plans that are already tied to financial performance. Against our $400 million cost target, we have identified $175 million to be completed by the end of the year with a significant majority of the remainder to be completed by the end of Q1 2023. Only a small percentage of the cost reductions taken to date are reflected in Q3 results due to a slight lag between taking action on headcount reductions and having those cost savings reflected in financial results. Given the nature of our cost structure, almost all of the planned reduction will be reflected in our operating expenditures, although we do anticipate achieving targeted reductions to some of the more fixed costs within our cost of services. While we are adjusting our costs, you can expect us to invest more aggressively utilizing our balance sheet during market weakness. In the third quarter, CBRE repurchased 5.1 million shares for $408 million, bringing our share repurchases through Q3 to nearly $1.4 billion. We expect share repurchases to increase sequentially in the fourth quarter, ranging between $500 million and $700 million. We also continue to remain an increasingly robust pipeline of M&A opportunities. Current market conditions are increasing the likelihood that we'll be able to act on them. For now though, buybacks remain the best use of capital, but that may change as we get into next year. Please turn to Slide 11. As we've discussed today, the broader economic outlook has worsened since our last update, necessitating that we revised our expectations for full year performance. As Bob indicated, we now expect full year core EPS growth to be up by mid-single digits compared with 2021. Our guidance most notably assumes that the capital markets remain under pressure. We expect leasing to remain more resilient than property sales, albeit with more muted growth than we saw in the third quarter. Due to the headwinds in our transactional businesses, we expect full year Advisory segment operating profit to decline by mid- to high single digits, with FX driving 3 to 4 percentage points of the decline. We expect our GWS segment will achieve low to mid-20% segment operating profit growth for the full year, fueled by continued strength in the fourth quarter. Absent foreign currency headwinds, we project segment operating profit growth for the full year in GWS would be 7 percentage points higher. Within our REI segment, we believe we have realized approximately 90% of our full year segment operating profit, largely due to the expectation of a few development asset sales in the fourth quarter. As noted previously, our outlook has been negatively impacted by the continued strength in the U.S. dollar. At midyear, we forecasted a $100 million full year negative impact to core EBITDA from FX. We've now raised the expected FX drag to $125 million for the full year, with $50 million hitting in Q4. Absent FX, we anticipate that core EPS growth would have been in the low double digits for the full year. We remind investors that it is difficult to forecast macro conditions and certain components of our business, notably capital markets, the timing of development sales and to a lesser extent, leasing are subject to fluctuations in overall economic sentiment. In closing, while near-term headwinds are intensifying, we remain as energized as ever about our long-term prospects and are committed to using our scale, balance sheet and cash flow to accelerate long-term growth and value creation. With that, operator, we'll open the line for questions.

Chandni Luthra:

So I understand that it's too early for 2023 outlook at this point. But if you could please perhaps give us some parameters to frame 2023. Like what would you need to see engines in capital markets to get restarted? Is there a way to frame capital market activity in terms of first half versus second half? Like when do you think the outlook really starts to get better?

Chandni Luthra:

That's actually helpful color. Switching gears to margins a little bit. So 13% margins in the quarter, down 450 bps. It's better than 3Q '19, but then, of course, the worst is still ahead of us. So help us frame margins in the context of 2019. Given that the macro is about to get much tougher and what you framed in your answer just recently, how should we think about margins in the context of 2019? Is there a scenario do you think we go all the way? Or do you think there is some recourse in the cost-cutting plans that you laid out?

Operator:

The next question is coming from Anthony Paolone of JPMorgan. Please go ahead.

Emma Giamartino:

Yes. And so in Q4, across advisory, we're expecting net revenue year-over-year to decline roughly 20%. And so -- but we're also expecting margin expansion because of the cost. So you're right.

Robert Sulentic:

Yes, Tony, that is just a function of the fact that we had 2 things go on, rates went up and spreads went up. Typically, when you see rates go up the way they did, spreads will come down a little, but both of them went up. And people just avoided refinancing because it was so expensive. It's that simple. We had -- and we had that circumstance play out in a way that was beyond what we would have expected. Now here's what I'll say about that. It's going to -- we think in the fourth quarter that you will see financing perform better than new sales. People are just not going to come back and trade assets until interest rates go down and until they think they can get the pricing they want, which will happen after -- in our view, after the Fed starts to go the other direction with interest rates, which we -- which, as Emma said in her prepared remarks, we think may happen later next year. But that's really what you saw happen in Q3 and especially what you saw happen in September.

Robert Sulentic:

Tony, when you say how much runway is it until that gets back to normal? Give a little more on that. I want to make sure I understand what you're asking there.

Robert Sulentic:

No, no. What's going on is, in fact, that there was -- and we talked about this last quarter, there were abundance of renewals in the marketplace to be done. We'll see that continue this year and into next year. But what we also expect to see now is some downward pressure as we go into a recession. There's always downward pressure on leasing in a recession because people are looking around trying to find ways to defer costs, save money. And so what they -- you have this dynamic that goes on, where they extend for a short period of time, et cetera. So we expect to see some of that come in and leasing to be more flattish in the fourth quarter, but we still expect some of the benefit from the built-up number of renewals that need to be dealt with to occur in the fourth quarter and into next year.

Robert Sulentic:

That's what we think. And maybe a little down, but that's how we think it's going to play out.

Operator:

The next question is coming from Steve Sakwa of Evercore ISI. Please go ahead.

Emma Giamartino:

To be clear, that's flat globally across all product types, and that's year-over-year.

Robert Sulentic:

Industrial cap rates like all cap rates have gone up. Industrial fundamentals have remained very strong. They backed off a little bit. We've seen a little bit of downward pressure on rental rates in some areas. We've seen slightly more vacancy, although the fundamentals are very, very strong. The markets held up very well. In the major markets, very little vacancy, strong demand still. So that has created a circumstance where there are buyers for the assets and there are owners of assets and developers, investors and developers that want to sell, but they're just not going to sell in the current environment because cap rates have ticked up and finance is expensive. And in our own portfolio as a developer, we've made the choice to defer sales for some of our assets -- some of our industrial assets. And I think what happened is we've already commented -- or what will happen, as we've already commented. When that circumstance eases, and we think that likely will be the second half of next year, those assets in the pipeline will get sold. Pipelines are very strong. The pipeline of assets that sellers want to sell and buyers want to buy are strong. And we think, starting in the second half of next year, you'll see all of that free up to a degree and start -- that market activity start to happen.

Robert Sulentic:

Well, office leasing and Industrious, they share some dynamics but they're different. Industrious provides a capability in the marketplace that's unique. You can get in and out quickly. You can get in and out without capital expenditure. You can adjust the amount of space you have very quickly. You can go into places that you don't intend to be long term. And with all the uncertainty around the use of office space and where it's going to go, Industrious' business has done quite well, and we believe it will continue to do quite well. And we're very excited about that investment and the performance of that investment. We've already commented today on office space. There is what you're seeing in leasing on office space is a pent-up amount of renewal activity and uncertainty about the -- about what's going to happen long term with offices. There's also a big bifurcation in how different parts of the office market are performing with the best buildings. The premier building is doing quite well with rents up and the less quality, less favored buildings suffering much more.

Robert Sulentic:

Yes. And that was my comment. That's where I started with Industrious. The trends that Industrious is seeing in the marketplace are very positive. We would characterize it as a record level of interest in that type of space. And it's been subjected to some different dynamics than regular office space. It creates flexibility. It creates the opportunity to get in and out of office space without capital expenditure. It creates the opportunity to get into a smaller amount of space and more convenient locations that you may not want to commit to long term. And as a result, it's doing extremely well.

Jade Rahmani:

What are you seeing in the GSE multifamily lending business? Historically, they've been countercyclical providers of capital. They don't price to a securitization exit, at least private label. And so their spreads may not be as wide. And they do have ample capacity on the FHFA governed lending caps. Are you seeing them step up in this point in time?

Jade Rahmani:

In terms of REI's prospects, how sensitive is the outlook to where interest rates are? Meaning if projects weren't stabilized, need to finance at a mortgage that's in the [indiscernible], is that going to inhibit sales out of that segment for potentially a longer-than-expected period?

Jade Rahmani:

Say for next year. I mean the timing of the outlook isn't that important, but I'm more concerned about if mortgage rates were stickier at, say, something in the 6% range, would that really inhibit a lot of those projects that are waiting to be sold. Would that inhibit the ability to sell those?

Robert Sulentic:

Yes, I'm going to add to that. That's true of our portfolio, and that's true of everybody else's portfolio in general, those asset sales will happen eventually. The assets are there. They're ready to be moved from one party to another. But the parties aren't going to do that until they feel like they're confident in the fairness of the pricing on the sell side and the buy side and the availability of financing that works.

Robert Sulentic:

Not on the long term sense. Nothing at all has changed in that regard. In the short term, you're describing the denominator effect, which we haven't seen it for a long time, but we have seen it before. And it will -- I think we will revert back to the trends we saw previously over the last decade. We're quite confident that will be the case. That's what we're very actively engaged with capital sources around the world, and that's where their head is at. But we do have this short-term circumstance that's precipitated by the debt markets and also the denominate effect, and that's really what we're seeing here and hearing about.

Stephen Sheldon:

First, I wanted to dig in more on the GWS new business pipeline. I think you said it increased significantly in the third quarter. Is there anything specific, I guess, driving that? And as macro uncertainty having any impact there in terms of the lane decision-making, or could it actually be creating more urgency to outsource to vendors like CBRE in this type of environment, but just love some more detail on what you're seeing there?

Stephen Sheldon:

Got it. That's really helpful. And then the follow-up, I guess, just wanted to ask as we kind of think about FX headwinds. I think you report your currency exposures and the SEC filings to revenue, but just curious if your expenses would also -- your expense exposure would also closely correlate to that? Or would you call out anything there where there's a material mismatch?

Operator:

The next question is coming from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Robert Sulentic:

Well, Patrick, one thing that's interesting is how long it's been now since the financial crisis. The cycles that we had previous to that were shorter. And so that kind of impacts people's thinking -- the other thing that impacts people thinking is they forget how deep the financial crisis was and how unusual it was compared to other downturns. But I can tell you what we're seeing now, and we've used this term multiple times on this call pipeline. There is a definitive, identifiable pipeline of projects across property types that want to be sold by the owners. And there is a lot of capital out there that wants to buy and neither of them think this is the right time to transact. That's what you're really seeing. We believe that when interest rates start to go the other direction, when the Fed reverses course because they think that the economy has gotten to a point where continued upward pressure on interest rates goes from being a problem-solving circumstance to a problem creating circumstance that we will see that pipeline start to transact, and it will recover. We can't give an exact number of years, but it will recover considerably more rapidly than it did coming out of the financial crisis.

Robert Sulentic:

Yes. Well, Emma commented on the $400 million number. That's the number we believe we can cut without impacting our ability to grow the business and serve our clients in the future. So a lot of work went into -- from the grassroots level up and from top down to identify that $400 million number. And I want to stress again something Emma said, we have a massive amount of our cost basis that flexes automatically when revenues go down, commissions, profit sharing and development and investment management, incentive equity, bonuses, all of that is completely independent of this $400 million, $300 million of which we think will be permanent and $100 million of which we think will come back when things get better. And we don't think that, that $400 million will create problems for our business at all.

Jade Rahmani:

A question investors often ask is where our commercial or let's just say, capital markets overall versus some prior periods, say, 2018, 2017? But I know that you all are constantly hiring producers. So could you give any sense for what the growth rate in number of producer headcount have been on the brokerage side relative to some past period so that we could adjust for that? And also, I think even if commercial real estate prices decline, the absolute nominal dollar of commercial real estate value is probably significantly higher than it was in 2017. So hard to compare next year versus 2017. But any color on that would probably be helpful.

Operator:

This brings us to the end of the question-and-answer session. I would like to turn the floor back over to Mr. Sulentic for closing comments.

Operator:

Ladies and gentlemen, thank you for your participation and interest in CBRE. This concludes today's event. You may disconnect your lines and log off the webcast and enjoy the rest of your day.

Brad Burke:

Good morning, everyone, and welcome to CBRE's Second Quarter 2022 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks, as well as an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that our presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects, including our 2022 outlook, core EPS growth and long-term positioning, operations, market share, capital deployment strategy and share repurchases, financial performance, including leverage, profitability and cost management, the business environment, the performance of acquisitions and other transactions and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q, respectively. We have provided reconciliations of the non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of the presentation slide deck. I'm joined on today's call by Bob Sulentic, our President and CEO; and Emma Giamartino, our Chief Financial and Investment Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Emma Giamartino:

Thank you, Bob. Before I go through this quarter's results, I want to touch on what we've seen in the market since we last spoke in May, what it means for our business and why we remain confident in our outlook. Over the past 3 months, and as I'm sure you're all following closely, rates on the 10-year treasury rose as high as 3.5% before settling down to 2.8%. The uncertainty over how central banks might respond to inflation creates uneasiness in the market, more so in the public market, but also in the private commercial real estate market. Against that backdrop and what it means for CBRE, it's best to think about our business in 2 parts. The first part includes business lines that grow consistently throughout an economic cycle and have low sensitivity to market uncertainty. This includes our outsourcing business, GWS and as well as valuation, property management, loan servicing and significant components of our Investment Management and Development businesses. Our GWS business can directly benefit from economic uncertainty as occupiers outsource their real estate management to CBRE to reduce their costs. These businesses have become significantly more important to CBRE's overall financial performance. The second part of CBRE's business is more transactional in nature, capital markets, leasing and parts of our development and investment management businesses. These are sensitive to market uncertainty in the short term. But short term is not the right time frame to measure the resiliency of this part of our business. Slide 6 illustrates my point. COVID-19 created enormous market uncertainty during 2020, much more so than we're seeing today. And as a result, the transactional parts of our business saw total net revenue declined by 26% for the 12 months through the first quarter of 2021 versus the prior 12-month period. What's important and what I think is underappreciated is that these transactions didn't disappear, they paused. When market uncertainty lifted, these transactions came back, resulting in a powerful recovery. The net revenue growth of these businesses outpaced the S&P 500 over the period starting pre-COVID through the recovery of the following year. When our management team thinks about market uneasiness and what it means for CBRE, we focus on things we can control, first, costs; and second, capital deployment. One of the biggest drivers of CBRE's financial resiliency that we believe is underappreciated is the overall flexibility of our cost structure, which Slide 7 summarizes. Just over 40% of our cost structure is passed through to clients. These costs are tied one-to-one with revenue, which is why we exclude them when discussing net revenue. Another 44% is attributable to cost of revenue. These costs are variable. For example, during COVID in 2020, we saw net revenue in our advisory segment declined by 16.5%, while our cost of revenue decreased 16.7%. The remaining cost is OpEx. Of this, about 1/3 can be reduced at a rate faster than revenue declines. These costs include travel, business promotion and compensation tied to financial performance. The remaining 2/3 of OpEx is more difficult to move in the very short term, but reductions are certainly possible over a 1- to 2-year time frame. In summary, nearly 90% of CBRE's total cost are either directly tied to revenue or a highly flexible in nature. CBRE has had a track record of moving aggressively, with targeted cost reductions when market conditions soften. We have invested in leadership, processes and systems to enable these reductions, and we now consider it a core competency. Today, we are already taking steps to limit new hires, eliminate nonclient-related travel and entertainment and reduce other discretionary expenditures. And we are prepared to go further if we decide more reductions are needed. While achieving these cost efficiencies we will continue to make very targeted organic investments into areas where we expect a high return. We will also be investing our balance sheet. On Slide 8, you'll see that CBRE repurchased $1 billion of shares through the second quarter. Since the end of the second quarter, we have purchased another $77 million. We believe this represents the highest and best use of capital for our shareholders in the current environment. We would not be able to purchase a company near the quality of CBRE at the valuation we currently see for our shares. As a result, while we continue to build an M&A pipeline, share repurchases are likely to represent the most significant use of our capital for the balance of the year. We will be able to make these investments while maintaining CBRE's strong balance sheet, which ended Q2 with 0.2x net leverage and $4.2 billion of liquidity. Before tying all of this together with our qualitative outlook for the full year, let's first discuss second quarter performance for our 3 business segments and what we're seeing in each segment's business pipeline. Slide 10 summarizes results in our Advisory segment, which were driven by a 17% increase in property sales revenue and a 40% increase in leasing revenue. Performance is strongest in the Americas, due to improved market fundamentals, with sales and leasing increasing 26% and 56%, respectively. Outside of the Americas, sales revenue was flat and leasing rose by 5%, as FX reduced growth by 10 percentage points for each. Both U.S. leasing and sales grew in every month of the second quarter, though we did see some deceleration in June. Preliminary results for July show U.S. leasing and sales revenue, together, essentially flat, with a strong level of activity seen in July 2021. Our commercial mortgage origination revenue slipped 1% during the quarter. The government-sponsored enterprises, which are an important part of this business, continue to lose market share in the second quarter against strong competition from private lenders. The GSEs act as a moderating force in the multifamily lending market, and it's reasonable to expect our debt business to underperform property sales when the market is strong. The flip side is that our debt business should outperform property sales if the market is soft for the balance of the year. This is similar to the dynamic we saw in 2020. Our Advisory SOP margin and net revenue declined by 1.5 percentage points versus the record second quarter margin of last year. Approximately 1/3 of this decline can be attributed to lower OMSRs, $35 million this quarter, versus $42 million in Q2 last year. The remainder of the margin decline is mostly attributable to more brokers hitting higher commission payout thresholds, driven by the strong revenue growth. Our pipelines give us visibility into our transactional businesses over the next few months. The sales pipeline is up slightly versus last year's record Q3, though transactions are taking longer to close and debt markets have become less accommodating due to market uncertainty. Our updated guidance anticipates a lower level of sales activity in the back half of the year compared against second half 2021 record levels. Our leasing pipeline is essentially flat with the very strong pipeline we had at this time last year. We continue to see healthy activity across property types, with office being an outperformer. Office is growing from pent-up demand against the relatively low base of activity and higher-than-normal lease expirations. And we're expecting more leases to expire over the next 18 months than in any 18-month period over the last five years. Turning to Slide 11, within our GWS business. Total net revenue growth of 27% and SOP growth of 28% was aided by continued strong performance from Turner & Townsend. Excluding the contribution from Turner & Townsend, GWS net revenue increased by 8% or 12% in local currency, and SOP rose by 5% or 10% in local currency. Turner & Townsend performance reflects continued growth from their prior year results, in line with our expectations. Both facilities management and project management net revenue grew by double digits in local currency during the quarter. Growth was broad-based by client type and supported by a mix of new wins and expansions. GWS achieved a record high $1 billion of deal closing in the quarter. As a result of these wins, the pipeline fell sequentially, but is expected to end in 2022 with a meaningfully larger pipeline than year-end 2021. CBRE's competitive differentiation with the occupier outsourcing market has never been stronger. Slide 12 summarizes results in our REI segment, which performed very well in Q2. Development was a big catalyst, with SOP growth of $96 million versus last year's Q2, as we monetized several large assets and land parcels. We've benefited from investor preference for the types of properties we build, high-quality, build-to-core, typically well-leased assets in markets with good supply-demand fundamentals. Investment Management contributed $58 million of SOP, up $13 million over last year's Q2. AUM hit another record, up slightly versus Q1 despite over $4 billion of FX headwinds. Looking forward for investment management with more than 90% of our AUM in core or core plus strategies, we expect healthy performance to continue despite market uncertainty. Looking forward for our development business, over 3/4 of our in-process activity is industrial, multifamily or life sciences products, and we expect continued outperformance over time amid of flight to quality trend. Cap rate expansion is a headwind. Market-wide, cap rates have moved out by about 50 to 75 basis points on average. Against this backdrop, development activity may be delayed during periods of uncertainty, but we will monetize our developments, which are highly sought after in their respective markets and are favorably financed, giving CBRE and our capital partners the flexibility to time the market for sales. Our in-process portfolio, totaling $19.3 billion, provides visibility into future development profits. As we've noted before, we expect 1% to 2% of our end process portfolio to convert to SOP over a 12-month period. A modest recession could cause SOP to fall to the low end of that range, and a softer market creates opportunities to secure land sites that drive future profits. Slide 13 summarizes our outlook. Within Advisory, we expect investment sales and, to a lesser degree, leasing to decline in the back half of the year against the very strong 2021. We continue to expect leasing and property sales growth for full year 2022, supported by the strong first half. In GWS, our record wins in Q2 should help to drive over 20% SOP growth for the back half of the year, supported by 10% organic growth in local currency and Turner & Townsend continued strong contributions. In REI, we've already realized around 3/4 of the SOP we expect for the full year, including over 80% of our expected development SOP. So even in a more challenging macro environment, full year development profit will well exceed our initial expectations. In summary, and as Bob noted earlier, we now expect CBRE to achieve total core EPS growth in the high teens for the full year. Our core EPS guidance takes into account both the impact of FX and the lower share count. Absent the impact of FX, both realized year-to-date and expected, our core EPS growth expectations would be 4% to 5% higher. With that, operator, we'll open the line for questions.

Anthony Paolone:

My first question relates to how you're thinking about the second half of the year, and you discussed sales and leasing being down. But I was wondering if you can give us some sense as to how you think about the effect of a potential recession on those revenues and what you think of as kind of base cases, in your mind, as to what drawdowns could look like?

Anthony Paolone:

Got it. And then on the buyback, you have free cash flow, but you're also below target leverage that you laid out. So I mean, when you think about continuing to do the buyback, is it about utilizing free cash flow? Or would you also be willing to move up closer to your target leverage?

Anthony Paolone:

Okay. And then just if I could sneak one last one in here. On GWS, when you noted the $1 billion of contracts that you signed up in the quarter. Should we think about that as just take a 10%-ish margin and this basically adds $100 million of SOP to GWS? Or I mean, is that how we should think about it?

Operator:

Our next question is from Chandni Luthra with Goldman Sachs. Please proceed with your question.

Robert Sulentic:

Yes, Chandni, it's not so much pricing as it is more certainty around where the economy is going to head, and also debt rates, what's going on with inflation and debt rates sorting out, I don't think most of the people going to the sidelines is being driven by the fact that they think asset prices are too expensive. The bottom line is in the 2 asset classes that are most attractive and most -- being most actively traded, industrial and multifamily, fundamentals are very strong. Rental rates are going up and the values are there as long as there's some clarity around where the economy is headed and where interest rates are headed.

Robert Sulentic:

Well, we baked into our thinking for the balance of this year and for next year and beyond, the notion that corporates are, in general, going to consolidate to a degree their use of office space. There's some good news and bad news for us in that. If there's less office space leased, we'll lease less office space ourselves on behalf of our clients, but we'll also do more project management work. The fact of the matter is though almost all corporates are going to take a significant amount of space. And there is a large backlog of renewals that need to be dealt with, and they are -- those renewals are going to get executed or they're going to move into new buildings. And so it's a factor of that huge volume of renewals coming even if the space they take is somewhat smaller than it was before that gives us confidence to talk about the numbers the way we did.

Steve Sakwa:

I just want to be very clear, Emma in -- I guess, on leasing and sales. It's pretty clear that I think sales activity is going to be negative on a year-over-year basis in the second half. I'm just trying to figure out, are you saying that you think leasing will also be negative? Or -- I'm just trying to read the wording. Are you saying, combined, those 2 are negative and leasing might be slightly positive, but sales is definitely negative?

Steve Sakwa:

Great. That's helpful. And then I just wanted to circle back maybe on the development profits. It obviously it sounds like you've got a lot of the full year in the bag, so to speak, given what you've done for 6 months. But maybe just talk about kind of the movement in cap rates and kind of the spread from where you were building to kind of where you're selling and just sort of the risks around that, maybe into the back half of the year and maybe as you think into next year?

Steve Sakwa:

Yes. I guess just a follow-up. I guess given the commentary around the uncertainty, right, people like those asset classes, but the debt markets have been probably more challenging and that's probably the bigger issue. So do we need to see like an improvement in the CMBS market or bank lending? I think people have confidence in industrial and apartments, but the financing markets are more gummed up today. So I guess...

Operator:

[Operator Instructions] Our next question is from Jade Rahmani with KBW. Please proceed with your question.

Robert Sulentic:

Jade, we look across our entire business, all 3 segments of our business, and we look across lines of business and the geographies within the segments. I will say that we tilt toward a few things. We definitely are looking for businesses that enhance our capability to serve our clients. We have increasingly large amounts of business with clients that ask us to do things around the world across lines of business, et cetera. And wherever we can fill in a capability that we don't have or that we think could be better, we target that area for M&A, because we know we have the clients there to do the work for. Secondly, we really are focused on this notion of driving our capital and our resources into areas of secular benefit, into areas that are resilient, and so we are looking for M&A opportunities that match up with that. We have a very definite plan in the various parts of our business. We have areas we prioritize. And if you looked at our M&A pipeline, it would be very evident. We also have this notion of certain aspects of what we're doing in that regard, understandably are confidential, and we wouldn't want to talk about what we're targeting specifically. But that's broadly how we think about it.

Emma Giamartino:

Jade, that's a very big priority for us, and it's a business that has performed incredibly well for us. This year, we're expecting our overall debt origination business to grow. And like you said, a large part of that is because of -- and grow in the back half of the year. And a large part of that is because of our exposure to the GSEs. So in the back half of the year, as we're expecting a recession and as property sales start to come down and private lending starts to pull back. We expect the GSEs will come back and accelerate and will benefit significantly from that. And so we are -- and as a part of -- it's not only our debt origination business, but also our loan servicing business. So building out that team, and we are very focused on continuing to grow that business. Because if you think about the parts of our business that we talked about as resilient, that's one of our businesses that can help drive growth and provide resiliency through the cycle.

Robert Sulentic:

Thanks, everybody, for joining us today, and we look forward to talking to you again in about 90 days.

Kristyn Farahmand:

Good morning, everyone, and welcome to CBRE's first quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks as well as an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects, including 2022 qualitative outlook, operations, market share, capital deployment strategy and share repurchases, financial performance, including net leverage, profitability, expenses, and effective tax rate, the business environment and the effect of the COVID pandemic and geo-political tension, the integration and performance of acquisitions and other transactions and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q, respectively. We have provided reconciliations of consolidated adjusted EBITDA, core EPS, core EBITDA, net revenue and certain other non-GAAP financial measures included in our remark to the most directly comparable GAAP measures together with explanations of these measures in the appendix of the presentation slide deck. Our agenda for this morning's call will be as follows Bob Sulentic, our President and CEO will briefly comment on first quarter highlights and the role that our four dimension diversification strategy and balance sheet are playing in driving our growth. Then Emma Giamartino, our Chief Financial and Investment Officer will discuss the quarter in detail and our updated qualitative 2022 outlook. Then we'll open up the call for questions. Please note that we are now referring to core adjusted EPS as core EPS for simplicity purposes. Additionally, we are also reporting core EBITDA, which like core EPS is equivalent to adjusted EBITDA, but excludes the fair value adjustments related to non-core investments. Now please turn to Slide 6 as I turn the call over to Bob.

Emma Giamartino :

Thanks Bob. Please turn to Slide 8. CBRE began the year with our strongest ever financial performance for a first quarter. Consolidated results were supported by double digit revenue and segment operating profit growth in each of our three operating segments. As Bob noted GAAP EPS was up 48% to a $1.16, while core EPS froze 72% to a $1.39. GAAP EPS was $0.23 below core EPS, mostly due to the mark-to-market evaluation of our non-core investments, particularly our Altus Power stake. The change in Altus’ valuation during the quarter, largely reversed the non-cash gain we realized in Q4, which we also excluded from our core earnings. Corporate overhead grew approximately $23 million for Q1 2021, but fell $40 million compared with Q4 2021. We continue to expect overall corporate overhead to decline slightly from 2021 levels for the full year. Our results are ahead of our own expectations across revenue, margins, and earnings. We're excited about the strong start to the year and the momentum we're seeing across our business. Please turn Slide 9 for a deeper look at our Advisory segment. Advisory Services, net revenue reached their first quarter record of $2.2 billion up 32% from last year. Within capital markets, we continue to see strong sales activities with total sales revenue up 58% versus last year. Strong property sales growth was broad-based across all major geographies with Pacific, North Asia and the U.S. being particular standouts. We have yet to see a material impact from rising rates on property sales. Globally office, industrial, retail and multifamily sales all surpassed their prior first quarter peak levels. While office remains the largest asset class and is to prior peak levels, it comprised about 20% of property sales in the quarter versus nearly one-third in Q1 2019, reflecting the sizeable gains we've made across the other property types. Our mortgage origination revenue excluding OMSR gains rose over 22% compared to Q1 2021. Industrial and multifamily originations continue to lead activity across property types. Lending markets remained highly liquid during most of the quarter with private lenders continuing to increase volumes. Lower government agency originations reflected robust private lending activity for multifamily assets, which continued to create attractive terms for borrowers and reduced events for agency debt. Our OMSR gains declined $50 [ph] million from the first quarter of last year reflecting this shift from agency to private lenders. Leasing revenue eclipsed prior peak first quarter levels in all global regions. Global revenue was up over 48% in Q1 led by continental Europe and the U.S. Continuing recent trends industrial revenue rose strongly, while the omicron variant pose continued challenges, we were encouraged to see global office leasing improved significantly from last year's COVID suppress level and fall modestly short of the Q1 peak set in 2019. We expect that recovery for office leasing will continue to improve from the COVID depressed levels of 2021 as leases roll over and occupy upgrade their office space. 70% of our surveyed occupier clients are planning a hybrid approach for their office return, and over 90% of them are planning to either expand or contract their office footprints over the next three years. This is a clear positive for our office advisory business, as any changes in space requirements drives not only commission revenue, but often also workplace advisory and project management fees. Despite heightened macro risk from persistent inflation, rising interest rates and geopolitical tensions, U.S. sales and lease activity has remained strong since the end of Q1 with revenue up significantly over the prior year during April. Advisory services segment operating profits started the year stronger than expected, up 40% to $466 million with our net margin increasing to 20.9% from 19.7% in Q1 2021. Prudent operating expense management largely offset higher cost of sales due to deals being more heavily weighted to our highest producing brokers and the lower OMSR gains. Turning to GWS on Slide 10, net revenue grew over $400 million or 27%. Excluding Turner & Townsend net revenue rose nearly 9% overall with project management up 13% and facilities management up 7%. Our new business pipeline points to facilities management revenue accelerating significantly as the year progresses. As clients gain more visibility about their space utilization and less their need for outsourcing services. Our pipeline revenue is at a record level with a diversified mix of financial services, defense, automotive, retail and logistics prospects. Overall GWS segment operating profit grew 33% or over 6% organically. Margins on net revenue grew to 10.9% in Q1 benefiting from the Turner & Townsend acquisition. After this acquisition net margins declined very slightly from prior year in line with our expectations. We expect a slight margin pressure to subside toward the end of the year. Turning to Slide 11, our REI segment posted another outstanding quarter. Revenue increased 34% to $284 million and segment operating profit grew to $167 million, up $104 million versus Q1 of last year which was modestly better than our expectations at the beginning of the year. Our development business continued to post excellent results benefiting from a strong pipeline and compressed cap rates. Development contributed nearly $107 million of segment operating profit in the first quarter, up from $10 million in the prior year. We saw multiple large co-investment asset sales in the first quarter notably in Industrial and Multifamily. Looking ahead, development operating profit is expected to be weighted to the first half of the year. However, any movement of development asset sales between periods, which is common in this business could impact the quarterly cadence of our results. Our development pipeline rose to more than $10 billion, and in-process portfolio reached almost $20 billion, both record levels. This gives us visibility into strong, long-term development operating profit growth. Historically we've converted about 1% to 2% of our in-process portfolio into operating profit annually. Our development business is also strategically well placed with industrial and multifamily comprise over three quarters of the combined pipeline, and in-process portfolio. Fee development and build-to-suits make up more than 50% of in-process activity. Our investment management business also turned in a strong performance in Q1, while operating profit declined by $9 million versus same period last year. The decline was due to a one-time $24 million accounting methodology driven gain we booked in last year's Q1 and called out at the time. Absent this gain operating profit improved about 33% supported by co-investment returns, which benefited from appreciating asset values. Investment management AUM reached a new record of nearly $147 billion with logistics and infrastructure climbing by 9% and 7% respectively over the quarter. AUM growth was driven by $4 billion of net capital inflows as well as higher property valuations only partially offset by unfavorable FX rates. We've also continued to benefit from the partnership between our investment management and development businesses, which has supported AUM growth for investment management and pipeline growth for our develop business. Turning to Slide 12 CBRE repurchased more than $390 million of shares in the first quarter, a record amount. As Bob mentioned, year-to-date through May 3rd we repurchase nearly 7 million shares for $627 million. We anticipate maintaining a significant pace of are repurchases for the balance of the year, absent, substantial and compelling M&A opportunities. We also remain committed to maintaining a durable balance sheet. Net leverage was just under 0.1 turns at the end of Q1, well below the midpoint of our zero to 2 times target range. This is despite the share purchases, seasonally higher use of cash for employee incentive compensation in this seasonally light revenue and earnings typical of our first quarter. Absent any substantial M&A opportunities we anticipate remaining below 1-turn at the end of 2022, even allowing for an elevated pace of share repurchases. Turning to Slide 13, as we look ahead, we have the same expectation for achieving mid-to-high teams consolidated core earnings growth for the full year that we provided at the end of February. Our business today continues to have strong momentum. Our base of contractual work in project management, facilities management and investment management is large and growing rapidly and lease and sales transaction activity through April remains robust. Commercial real estate markets also are healthy with office, retail and multifamily fundamentals improving and industrial fundamentals remaining strong in core markets. Materially offsetting these continued positive trends, the broad economic backdrop has softened and interest rates have risen since we've provided our earnings outlook in late February. We have taken some of these dynamics into consideration in reaffirming our full year expectations. Specifically should an economic downturn emerge we expect the more resilient and secularly favored parts of our business to help offset any potential weakening and other parts of our business. In particular, we have noted that office leasing is benefiting from strong tailwinds that we expect to sustain for some period of time. Additionally, we have identified cost measures, we can implement quickly should market conditions warrant. On the other hand, if the macro environment remains supportive for the rest of the year, there could be upside to our current expectations. Additionally, our outlook does not include any benefit from incremental M&A activity or share repurchases. We expected to be active capital allocators for the rest of the year and would be positioned to move aggressively in a weaker economic environment. We look forward to updating you when we report second quarter results in July. With that operator, please open the line for questions.

Chandni Luthra:

Hi, good morning. Thank you for taking my question. Bob, Emma could you talk about what are you both seeing on M&A front? I mean, you've obviously talked about heightened macro volatility, but in a tougher environment do you think there is potential for more M&A opportunities? And then could you give us some insight into how the pipeline is looking right now and how do you think about M&A considerations multiples in this environment?

Emma Giamartino:

Yes. I would just add that our pipeline is really strong for M&A, so we're building it for the rest of this year and 2023 and beyond so that we can really be ready when we believe valuations will come down and we can be aggressive in taking advantage of that opportunity. And then I will also add that I said this in my remarks but it's important to reiterate that our outlook does not include any this M&A this year or incremental buyback. So all of that should be upside to our outlook this year, and that stands for 2023 and beyond. Our long-term outlook does not include material capital allocation.

Bob Sulentic:

Well, that's a multi-layered question, Chandni. There's a lot of focus on cap rates. There's a lot of focus on the cost of debt, but when you look at the trading of assets and the value of assets you also have to look at fundamentals and you also have to look at the amount of capital that's out there pursuing those assets. Fundamentals are exceptionally strong. I think historically strong in the multifamily asset class. Vacancy is as low as it's been in 20 years. The amount of pent-up demand relative to the amount of vacancy is also as low as it's been in 20 years. There's upward pressure on rents and there's more renters out there in the market than there is new product coming online. So that bodes well for the value of those assets. The other thing that I think gets missed a little bit by people and it's sometimes cited as a problem for our sector, which it is a challenge, and that is what's going on with the cost of assets. The cost of assets is going up. Construction cost is going up. Fundamentals have allowed rental rates to make up for that and the value of assets, but when you think about – how investors think about product, one of the things they always consider is replacement cost. Anybody that comes into the market today and buys assets can have a decent level of confidence that replacement cost is going to be above what they pay for those assets, so that's positive dynamic. And it's not as extreme with the industrial asset class as it is with the multifamily asset class, but when you go into core markets around the U.S. the big gateway markets and the most important secondary markets. And when you look at modern large industrial assets which is where we play primarily, the fundamentals there are extremely strong as well. So I was meeting with one of the most active players in the New York – New Jersey industrial market yesterday and their comment was it's sold out, right? There's not available space up there. And the Amazon news is important. They've been the biggest – the biggest leaser in across the U.S. the last couple years, I will tell you that Amazon their percentage of the market slowed down in the last 12 months by over half what it was in 2020 and the fundamentals haven't really changed. There's strong, strong demand for any space that exists out there. So we're relatively bullish about what's going to happen with values for both multifamily and industrial assets at the same time we're very aware that if there is a recession, if [indiscernible] do take up, if debt becomes more expensive which it will, there could be a period of time when the buyers and sellers go to the sideline, and that's baked into our thoughts about where we're headed for this year and next year.

Operator:

Our next question comes from the line of Steve Sakwa with Evercore ISI. You may proceed with your question.

Emma Giamartino:

So, yes, I think that [indiscernible] well, but to put some more color around that, and to be clear, if we weren't seeing pressures from the macro environment we would be increasing outlook. And so we've spent a lot of time sensitizing what we think is going to happen through the second half of the year. And there are a number of factors that are giving us confidence that will – that we'll deliver the outlook that we expected to in February. Like you said in Q1 has been really strong. Our pipelines for Q2 and our transaction business are very strong, we are anticipating if interest rates rises as expected there will be slowdowns in parts of our business in the second half of the year, which will be offset by our secularly favorite parts of our business. And again, I want to remind everyone that capital allocation is not included in our outlook, so that will be upside. And then I also want to mention that in my remarks, I talked about the cost levers that we have in place. So if things turn in a different direction then we're expecting, and there is more pressure. We have cost levers that we know we can pull, and we've proven that we can pull through 2020 and 2021. So that gives us a tremendous amount of confidence in 2022. And then we also look towards 2023, because we know everyone's really thinking about what's going to happen if interest rates continue to rise. And we ran some sensitivities around what we expect next year and everything that we said about 2022 really holds for 2023. We have – we are more contractual. We have more recurring revenue than we've ever had before. We've invested in growing in our – in secularly favorite areas. And we believe those parts of our business are really going to offset areas where we'll see pressure like capital markets and potentially in development. So we feel very positively about where we're going to go in 2022 and 2023, and think there is upside to what we're talking about.

Emma Giamartino:

So the capital allocation strategy that we've talked about over the past few quarters remains unchanged. We are prioritizing accretive strategic M&A when we see opportunities arise and we're very focused on building that pipeline, and executing on those opportunities. But valuations are high and so it's really important that we're patient. We want to make sure that we're delivering returns that are well above the returns we can deliver through buybacks. But we always said we would balance that with buybacks when we don't see a huge opportunity for transformational M&A within a year. And so that's what we've done. We've seen a value opportunity. Our price has been very attractive. So as long as that continues we will continue to buy back shares through the rest of the year.

Operator:

Our next question comes from the line of Anthony Paolone with JPMorgan. You may proceed with your question.

Emma Giamartino:

So, we're making a shift, as you can see in this quarter to really focus on our consolidated performance, because we are a more mature, diversified business where we have multiple levers. And one single factor we don't believe should impact our long-term or even near-term growth trajectory. So, I'm not going to comment on specific parts of our business, but as both Bob and I've talked about where we potentially see a slowdown in the second half of the year is primarily in capital markets. And then I do want to comment on development. I mentioned this in my remarks and we mentioned it last quarter, but simply because of timing, the majority of our development profits are going to hit in the first half of this year. It doesn't have anything to do with the external environment. It's simply when these projects are expected to be completed. And if you look at those profits on an annual basis, I think, that's the best way to look at the sustainability and the stability of those profits. We've said that about 1% to 2% of our in process portfolio typically converts to SOP in any given 12-month period. Right now we're slightly ahead of that, but if you extrapolate that to 2023 and expect that profit to move more in the 1% to 2% range, that can give you an idea of the sustainability and stability of our development pipeline.

Emma Giamartino:

So the only place where we're seeing costs come back, which we anticipated and talked about in Q4 is within our GWS business. And that’s just our reversion to pre-pandemic levels. During the pandemic, we were servicing facilities and buildings, although people weren't going to disabilities and office buildings. And so the cost to service those buildings declined in an unusual way. So we’re going back, we’re reverting to normal with in our GWS business. And we’re seeing some margin pressure this quarter. We expect that to like to mediate throughout this year. So margins within a legacy GWS business is slight tick up through the remainder of the year. But in the rest of our business, we’re actually seeing within advisory you’re seeing stronger margins than we expected and so that’s evidence of our ability to control our cost all of the cost measures we put in place. Bob mentioned that our discretionary costs this quarter are down pretty meaningfully. And our hiring has flowed somewhat simply because of the challenge labor market. So we feel really good about our margins.

Bob Sulentic:

Tony, we think – well, first of all, that's a very big part of – GSE business is a very big part of our lending business. It's moved more to private lending in the last quarter, and the first quarter of this year. And we're watching to see what's going to play out for the rest of the year and next year, as it relates to mortgage servicing, which has become a big and very recurring, very contractual business for us. We expect that continue to grow partly from the business that we source, but also partly from business that we take on from others.

Emma Giamartino:

So, there's two factors. One, private capital has been very aggressive with their lending terms, so the GSEs are simply being outcompeted. And then the GSEs pulled back. If you think about Q1 of last year they needed to provide liquidity. And this quarter, because the markets have been flooded with liquidity, they didn't have that same that same need.

Operator:

Our next question comes to the line of Patrick OShaughnessy with Raymond James, you might proceed with your question.

Bob Sulentic:

Market conditions are really good in EMEA right now, I was just over there last week. I was over there for a Turner & Townsend Board meeting, which by the way that company is doing extremely well. And what we found out was across the UK and across Europe leasing is strong and coming back, the industrial asset class is holding up well, there's large amounts of capital to be invested in commercial and multifamily assets. Multifamilies are smaller business over there than it is over here. I would say the fundamentals across Europe right now are quite strong and our business is performing – our advisory business there is performing better than it's ever performed in the history of our company. So we're feeling really good about that business now.

Bob Sulentic:

Well, it's important to remember that we bought 60% of the business, 40% of business remains with the partners that the legacy partners in Turner & Townsend. We govern that company through a board of directors, three directors from CBRE three directors from Turner & Townsend. And the integration has largely been a revenue integration. We have not tried to seek cost synergies out of that deal. We have not tried to alter the way they go-to-market. The infrastructure that supports that business is our infrastructure, the way the integration is progressing is we're working with them to bring them into our client relationships as an added capability. We have some other resources that we're providing to them to help them grow their business, but it is not a traditional full on integration. The best comp for Turner & Townsend in our company would be the way we operate Trammell Crow Company, although we own a hundred percent of it, roughly 40% of the economics go to the developers. Trammell Crow Company has kept its brand. They've operated independently. They have a tremendous culture and they've grown tremendously. And we've modeled Turner & Townsend after that. They liked that model. They wanted that model. We’re six months or so into the relationship. As I said, in my opening remarks, both financially and operationally it's proceeding better than we had thought it would proceed. And we were quite bullish about the investment when we made it. There is a bunch of stuff that Turner & Townsend would like to do, and we would like to do together with them that we haven't been able to get to yet simply. They're running at capacity and as they add capacity, that capacity is fully utilized. So, there's a good deal of upside associated with what might happen with Turner & Townsend and next year and beyond. And Emma kind of commented on that when she gave you that little snapshot of how we think 2023 might play out. We think there is some upside to Turner & Townsend because of the secularly benefited areas that they operate in.

Operator:

Our next question comes to the line of Jade Rahmani with KBW, you may receive with your question.

Bob Sulentic:

There's a lot there in that question, Jade. Let me try to take the pieces off as you ask them. So first of all, with regard to energy/sustainability, we're embedding that in many of our services across the company. And it's not necessarily a separate profit line, but the capability in our facilities management and property management and project management and development businesses that brings sustainability to those product lines helps us grow those businesses. And then Turner & Townsend directly does things with regards to sustainability that are important product lines for them. Infrastructure, you're going to see growth in infrastructure through Turner & Townsend. You're going to see growth in infrastructure through our investment management business, and they've grown the AUM there very nicely. But when you look across our business, and again, I want to beat this drum because it's so important, we are really broadly diversified across product type, service type, client type and line of business. So where are we going to see growth across those four dimensions. The work we do for big technology companies around the world is going to continue to grow significantly. And it's likely not going to be all that subjected to economic downturns compared to some other things out there. Project management, with all that's going on with sustainability, with all that's going on with reorienting offices to the future way they'll be use, we think that there's going to be sustainable growth there. Ironically, when you look at what's happened to our business over the last two or three years during the COVID area – era, everybody knows that we faced secular headwinds in the office building part of our business, which is a big part of our business. What we now believe for at least the next two or three years, we're going to have real secular tailwinds with office as occupiers go back to renewing or changing the leases they have. We've got a very good insight into what that pipeline looks like as occupiers reconfigure their space, et cetera. We think we're going to actually benefit. At the same time, we might see some downward pressure from what's going on with interest rates and cap rates and the economy as a whole, we actually think office is going to come back in and provide some tailwinds for us. We're very, very encouraged about that. And then when you kind of get deeper into our business and look at those four dimensions, I'll give you an example of something that we haven't talked a lot about, we've mentioned it kind of in passing. But if you look at our advisory business, over the last few years I often get the question, what part of the world should that business grow the most. And well, it should grow the most in part of the world where the economy is growing the most and that continues to be Asia. If you went back five or six years, our advisory business in North Asia was probably no more than 1% to 2% of our business. It's likely to be 6% to 7% of our advisory business this year. Not that much of it in China because of what's going on in China, but Korea is really growing for us, Japan is really growing for us, Hong Kong is really growing for us. We have a nice business in Taiwan, and then we think eventually, China is going to kick in when things sort out now. So we've got pockets of opportunity for growth across those four dimensions. And that's why when Emma talks about what's going to go on the rest of this year and thinks about what might happen next year even if things get a little tough in the economy, even if we go into a mild recession, we're pretty encouraged about where we sit out there. And then, of course, in all of those areas, we have capital to drive into acquisitions if things slow down, and it's easier to buy some things than it is today.

Bob Sulentic:

And we do watch the denominator effect, and we're wondering if that's going to have an impact next year depending on what happens with equities. If those go down and then real estate holds up and becomes a bigger part of the portfolios that may put a little downward pressure on some institutions buying commercial assets. But I will tell you what we've seen around the world, around the world, is there is more capital for real estate than there is real estate for capital right now and that's equity capital and that's debt capital. And people really like the fundamentals and they believe in this asset class more and more for the long-term. There could be an interruption later this year, there could be an interruption next year, but the long-term trajectory is more institutional capital is being aimed at commercial real estate assets and institutional quality multifamily assets. And the base of assets around the world is growing. So we think that this is a really nice, long-term trend for our company in the sector we compete in.

Emma Giamartino:

So we do see that alleviating somewhat as valuations increase and the GSEs come up to speed to where the private markets are. One of the factors that's impacting the GSEs is that they do have new leadership in place, so as they go through that transition and as the leadership comes into gain some – moves further into their term, we expect GSEs to pick up.

Operator:

Our next question comes from the line of Stephen Sheldon with William Blair. You may proceed with your question.

Bob Sulentic:

There is a few things about that trend that are really important to our business. One is that institutions historically have tended to trade a bit more than non-institutional owners. So that's good. That adds to the velocity associated with our brokerage businesses, both brokerage of debt and brokerage of the assets themselves. Secondly, what's happening is these institutions that are controlling the assets are growing; they're getting bigger and bigger. And they tend to want to work with fewer and fewer service providers. We're a beneficiary of that. By the way, we're a big beneficiary of that with occupiers and we're a big beneficiary of that with investors. And one of the things we've done with our family is – not with our family, with our company is working incredibly hard to be connected across lines of business and geographies so that we can offer a product to these big institutions that invest in real estate and these big occupiers that use real estate, so that they feel like they can comfortably use us instead of a group of companies. That's been a really powerful trend for us. We expect it to consider or we expect it to continue. And so when you look at what you're describing, Stephen, for the institutional ownership of assets, we think it's going to be a positive secular driver in the growth of CBRE, and we think – and the same thing is going to happen with the occupiers, and it is happening.

Operator:

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Bob Sulentic for closing remarks.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.

Kristyn Farahmand:

Good morning, everyone, and welcome to CBRE's Fourth Quarter 2021 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks as well as an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects, including our 2022 qualitative outlook and multiyear growth framework, operations, market share, capital deployment strategy and share repurchases, M&A and investment activity, the performance of existing investments, financial performance, including cash flow, profitability, expenses, margins, adjusted EPS, core adjusted EPS and the effects of the COVID-19 pandemic, the integration and performance of acquisitions and other transactions and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only, and certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q, respectively. We have provided reconciliations of core adjusted EPS, adjusted EPS, adjusted EBITDA, net revenue and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of the presentation slide deck. Our agenda for this morning's call will be as follows. First, I'll provide an overview of our new financial metrics. Next, Bob Sulentic, our President and CEO, will discuss initiatives that support our 4-dimension diversification strategy. Then Emma Giamartino, our Chief Financial and Investment Officer, will discuss the quarter in detail our capital deployment strategy, our initial qualitative 2022 outlook and our updated multiyear growth framework, then we'll open up the call for questions. As you can see on Slide 5, the fourth quarter completed a strong and transformative year for CBRE. We made strategic investments in Turner & Townsend and Industrious and saw significant gains from strategic noncore investments made through our SPAC and in venture capital funds. Due to our controlling interest that results from our 60% ownership stake in Turner & Townsend, we fully consolidate Turner & Townsend's financials, including their balance sheet. We will focus our commentary on consolidated performance inclusive of noncontrolling interests, and we will use consolidated adjusted EBITDA for our net leverage calculations. To give more transparency to our investors, we are introducing a new earnings metric called core adjusted EPS this quarter. Core adjusted EPS excludes the impact of strategic noncore, noncontrolling investments that are not attributable to a business segment. These had an immaterial impact prior to 2021. These investments are a small part of our portfolio, but there is likely to be considerable volatility in their fair values, particularly for Altus Power, the largest of our investments now trading on the New York Stock Exchange. We believe this new metric will help investors better assess the underlying performance of our core business. Starting in Q1, we will also present strategic noncore investments in corporate overhead separately, which today are combined. We believe this incremental transparency will help investors assess the level of corporate overhead and the performance of these noncore investments. We've also enhanced our presentation today to help provide greater insight into our performance. As a result, the slides accompanying our remarks are different from previous quarters and focus on the most significant drivers to our consolidated results for revenue, adjusted EBITDA and earnings. The segment-specific slides we presented in previous quarters are included in the appendix, as are some slides from our research team detailing the long-term historical relationship between real estate and inflation that we believe investors will find topical. With that, please turn to Slide 7 as Bob provides insight into our strategy. Bob?

Emma Giamartino:

Thanks, Bob. 2021 was an outstanding year for CBRE with strong growth across our key financial metrics and record free cash flow driven by operational discipline and our 4-dimension diversification strategy. We're also well positioned for future growth, which I'll discuss shortly. Throughout my remarks today, I'll highlight how our results benefited from asset type diversification, and in future quarters, I will focus on the benefits of other diversification dimension. Now please turn to Slide 9, so we can dive into our results for the quarter. Like Q3, I'll include compares with Q4 2019 for their transactional business lines to provide insight into our performance from peak levels. On a consolidated basis, revenue grew 24% compared to Q4 2020 and 20% over Q4 2019 led by rebounding sales and lease revenue. Advisory Services added nearly $1 billion in net revenue, growing 43% for Q4 2020 and 23% over Q4 2019 to over $3.3 billion, a record for our largest segment. We continued to benefit from a supportive property sales backdrop. Globally, sales revenue jumped over 73% from Q4 2020 and 45% from Q4 2019. The U.S. led the recovery among our major markets with 89% sales revenue growth compared to the prior year quarter. We had the highest market share across all major asset types in 2021, while our overall U.S. market share rose 100 basis points in the quarter according to independent data provider, Real Capital Analytics. Capital inflows into multifamily and industrial remained strong, allowing us to benefit from the very intentional work we have done to build leading sales platforms focused on these asset types. U.S. industrial sales revenue more than doubled from Q4 2019, while U.S. multifamily sales nearly doubled over the same period. Office continues to gradually improve back towards pre-pandemic levels. And our U.S. office sales revenue was around 14% shy of Q4 2019, an improvement from steeper declines in the prior quarters. Global leasing revenue rose 14% compared to the fourth quarter of 2019 with all 3 regions ahead of 2019 levels for the second consecutive quarter. EMEA leasing revenue grew 25% on Q4 2019, and the Americas was up 13%, while APAC grew 7%. Industrial leasing surged around 60% compared to the fourth quarter of 2019 as occupier demand for distribution space remains strong. Like in sales, office leasing also continued to recover with global office leasing nearly flat versus Q4 2019. EMEA and APAC office leasing rose around 7% and 11%, respectively, compared to Q4 2019. U.S. office leasing revenue trends also continued to improve. While still below its 2019 level by around 4%, the year-over-year shortfall from prior peak levels has narrowed compared to previous quarters. Notably, while it's still early in the year, we are continuing to see strong momentum in both U.S. sales and leasing thus far in 2022, with revenue trending significantly above prior peak first quarter levels. Loan servicing was the primary growth driver within the rest of advisory, with revenue rising around 70% from Q4 2019 to nearly $93 million. Our loan servicing portfolio grew 23% versus the prior year and 10% sequentially to nearly $330 billion, primarily driven by private capital sources. Our multifamily portfolio, comprising nearly half of the total, grew about 14% versus Q4 2020. Our alternative asset type portfolio, which includes agriculture, health care, hotels and others, rose over 70% and now comprises approximately 19% of our total servicing portfolio. Growth was driven by a strong pace of third-party servicing wins, which is a key focus area for growth in this business. OMSR gains faced a tough compare and were down about $47 million. These gains were elevated in last year's fourth quarter as the government agencies were extremely active in providing liquidity to a multifamily market burdened by COVID impact. Turning to GWS. Net revenue grew 22%, increasing $330 million to nearly $1.9 billion. This includes about $175 million in net revenue from the Turner & Townsend transaction, which closed on November 1 and was in line with our previous expectations. We are extremely excited about the growth trajectory for this business. Project management is a fragmented market, estimated to be over $100 billion with strong secular growth tailwinds, particularly within infrastructure. This transaction helps to bolster the nascent infrastructure capabilities within our existing businesses. We believe broadening our infrastructure offerings will help to accelerate future growth and deepen diversification, especially by helping to further insulate our business for more cyclical trends. Our legacy GWS revenue grew nearly 8% led by project management, which rose about 17%, excluding contributions from Turner & Townsend. Strong growth in project management was driven by continued recovery from the pandemic-constrained environment. Facilities Management revenue increased nearly 6%, and net revenue rose over 10% supported by growth from local clients. We expect Facilities Management growth to benefit from continued progress in returning to a more normal business environment in 2022. Looking at REI, revenue increased $125 million or 43% to over $413 million. This was driven by increasing activity in our U.K. multifamily development business, which is continuing to recover from COVID-related challenges. Investment Management revenue was relatively flat versus Q4 2020 at about $150 million due to lower carried interest revenue, which can be volatile. Excluding carried interest revenue, Investment Management revenue grew 19%, driven by strong asset management fee growth. AUM rose to a new record of nearly $142 billion with more than 80% invested in assets other than office. Industrial comprises the largest component, in line with our strategic vision to position the company to benefit from this sector's strong secular tailwinds. Flipping to Slide 10. Consolidated adjusted EBITDA grew to over $1.1 billion. Excluding noncash gains related to OMSRs, our Altus Power investment through our SPAC and venture capital investments, adjusted EBITDA grew over 37% compared to Q4 2020. On this basis, our underlying adjusted EBITDA margin on net revenue rose 6 basis points versus Q4 2020 to 16.5%, which is 1.7% above our Q4 2019 level. Advisory Services segment operating profit marginally exceeded our expectations, increasing $219 million to over $740 million as sales and lease revenue rose more than expected. Advisory's net operating profit margin, excluding volatile noncash OMSR gains, reached a new record of 21.5%, about 120 basis points better than Q4 2019. We achieved this despite record productivity pushing more producers into higher split tranches. In GWS, legacy segment operating profit reflected higher-than-expected medical expenses as we saw a ramp-up in year-end insurance claims compared with 2020's severely pandemic-constrained levels as well as a $3 million impact of noncash deferred purchase consideration expense for Turner & Townsend. Turner & Townsend profitability performed in line with our expectations, contributing just over $23 million of profit from November 1 through year-end. REI segment operating profit rose $39 million to $156 million and was roughly in line with expectations as outperformance in Investment Management offset a modest shortfall in development. Investment Management benefited from higher-than-expected net promotes and co-investment returns driving operating profit to $41 million. Development operating profit of $122 million was affected by a $29 million increase in the reserve we had previously taken on a U.K. construction project that faced challenges that were exacerbated by the pandemic. We believe we have fully reserved for this project and don't expect it to result in further adverse financial impacts. Putting aside this reserve increase, development operating profit would have been over $150 million for the quarter and about $380 million for the year, surpassing our previous expectations. This was driven by the conversion of our average in-process portfolio to operating profit at a rate of over 2.1% over the trailing 12-month period, a level well above our historical norm of between 1% and 2% with most years around the midpoint. We also saw increased corporate overhead in the quarter. This is largely driven by higher incentive compensation as performance materially exceeded initial 2021 expectations and our investments in key corporate functions to help support our larger business. We do not expect incentive compensation to fluctuate as much in 2022 as business volatility continues to normalize. Looking at Slide 11, adjusted earnings per share rose 51% to $2.19. This includes a benefit of $0.36 from a gain in our SPAC investment and another $0.03 from mark-to-market adjustments on our Altus Power and VC investments. Excluding these noncash gains, core adjusted EPS rose 24% to $1.80. Excluding only the SPAC deconsolidation gain, which is consistent with how we've reported our results in previous quarters, adjusted EPS rose over 26% to $1.83. Robust underlying earnings growth reflects the strong increase in adjusted EBITDA as well as lower net interest expense. These were partially offset by higher depreciation and amortization, mainly related to elevated prepayments of government agency-related loans, which triggered higher OMSR amortization. Our results also include noncash interest expense related to deferred purchase consideration for our remaining Turner & Townsend payments and an increase in our effective adjusted tax rate to 23.9%. The nonrecurring reserve increase in the U.K. multifamily development business lowered earnings by approximately $0.07. Going forward, as Kristyn noted earlier, we'll report both adjusted EPS and core adjusted EPS to give you transparency into how both our core operations and noncore investments are performing. Now we'll discuss our financial capacity on Slide 12. Due to our strong profitability, we generated nearly $1.1 billion of free cash flow in the quarter, bringing our annual free cash flow total to almost $2.2 billion, which is a new record for our company. We ended the year with a net cash position of 0.2 turn while deploying nearly $1.8 billion of capital, net of debt issuance proceeds during the year, primarily for investments in future growth. We also repurchased around $370 million of stock, providing our shareholders a repurchase yield of over 1%. We intend to continue this capital deployment strategy and believe there is ample opportunity to invest in future growth while also programmatically returning cash to our shareholders. In support of this, we commenced our fifth consecutive quarter of repurchases in Q1 2022. We intend to continue repurchases throughout this year, assuming the return remains attractive and we have capacity given our evolving M&A pipeline. Additionally, as we move forward, strong free cash flow conversion will remain a priority for us, and our senior executive team will be evaluated on this metric as part of their 2022 goals. Please turn to Slide 13. We expect another year of strong growth in 2022. Market conditions remain generally favorable, notwithstanding heightened geopolitical tensions, and tailwinds are likely to persist across the 4 dimensions of our business and areas where we are proactively investing to drive growth. Advisory Services is positioned for another year of strong revenue and segment operating profit growth, with leasing revenue expected to rise at a high teen to low 20% rate and sales revenue expected to rise at a low to mid-teens rate. We expect incremental benefit from offices gradual recovery and that industrial leasing should decelerate modestly due to a potential near-term shortage of available properties. As Bob highlighted earlier, we believe long-term secular trends are bolstering demand for industrial space and expect strong performance for this asset class on a long-run basis. Outside of sales and leasing, we expect advisory revenue to rise at a high single-digit to low double-digit clip compared to 2021. We also expect advisory's operating margin to be roughly flat versus the prior year as the benefit of high-margin transactional revenue growth will be tempered by some operating expense investments designed to accelerate future growth. Advisory operating profit expectations also include increased strategic equity awards to help better align a broader leadership team with our enterprise strategy and shareholders. We expect strong long-run margin performance in advisory, partially driven by these investments. In GWS, we expect low to mid-double-digit organic top line growth and mid- to high single-digit organic segment operating profit growth. This is being driven by continued strong growth in project management and accelerated growth in enterprise facilities management, partially driven by a return to normal contract cycle times. We expect this growth to be more weighted to the second half of the year. GWS legacy segment operating profit expectations also include the impact of $17 million of noncash deferred purchase consideration expense for Turner & Townsend. This expense will continue through 2025 when we've made the last of our required payments. We will also record about $10 million in noncash interest expense associated with our deferred payments. Like in advisory, GWS operating profit expectations also include an impact from increased use of strategic equity awards. This is reducing expected legacy segment operating profit growth by around 1%. We expect Turner & Townsend to grow net revenue at a mid-teens rate, in line with its historical average over the approximately $974 million it generated in calendar year 2021. Strong organic growth is expected to more than offset a small foreign exchange headwind at today's spot rate. Turner & Townsend net operating profit margin is projected to tick up around 0.5% from the 13.4% generated in the fourth quarter. This reflects strong top line growth, the restoration of certain expenses cut during COVID and about $10 million of noncash expense for retention bonuses. REI revenue is expected to grow around 20%, and segment operating profit is expected to roughly match the elevated operating profit of $520 million generated in 2021, excluding the $24 million accounting change-driven gain that we recorded in last year's first quarter. Revenue growth is being driven by continued recovery of our U.K. development business. Our REI expectations also contemplate elevated hiring and investment management for new product development, a key strategic focus as well as more moderate appreciation and asset values. Finally, we expect our development in-process portfolio will convert to operating profit at a rate of under 2%, in line with historical performance. Our in-process portfolio is well positioned for the current environment with nearly 80% of the portfolio comprised of industrial, multifamily, health care and life sciences assets. As you can see, we are consciously orienting the portfolio towards assets with strong long-term performance potential. Setting aside any effects of our strategic noncore investments, we expect corporate overhead to decline nearly 5% from 2021. We anticipate investments in further scaling key corporate functions to be more than offset by more favorable incentive compensation impact. Going forward, core adjusted earnings, which excludes the impact of our small portfolio of strategic noncore investments, will be the basis of our financial forecast. We are making these investments for their strategic value rather than near-term financial gains. However, there will likely be sharp volatility in their investment valuation, especially for our largest noncore investment in publicly traded Altus Power. Altus is poised to benefit from the transition to a low-carbon economy while enhancing capabilities to help our clients meet their clean energy and sustainability goals. As always, for investments of this nature, short-term bouts of market volatility can cause the value of our investment to swing sharply on a quarter-to-quarter basis. For example, the majority of the noncash gain we recognized in the fourth quarter would be reversed in the first quarter at Altus' share price as of February 15. Now looking at depreciation and amortization. We expect this to rise about 4%, and we project our effective adjusted tax rate to be in line with the 23.9% rate we saw in Q4 2021. We are also highly focused on monitoring how inflation could impact our business. Real estate provides a natural inflation hedge when held on a long-term basis, which somewhat cushions our transactional businesses. In fact, sales could potentially even benefit if inflation concerns draw more capital to real estate. On the expense side, clients reimburse us for the salary and benefits of nearly half of our employee base who work primarily in the GWS and property management businesses, and inflation provisions are typically embedded in our multiyear GWS contracts. In light of this, we believe we are well positioned to succeed in a higher inflation environment. It is also prudent to highlight that while the current operating environment remains favorable, there is heightened uncertainty given this higher inflationary environment, tighter monetary policy and rising geopolitical tensions. Please turn to Slide 14 for an update of our multiyear growth framework. As Bob noted, we've raised our base case annual core adjusted EPS growth expectations to more than 20% for the 2020 to 2025 period and to low double digits for the next 4 years. There is upside to both growth rates from additional capital deployment. We envision solid organic revenue and earnings growth across our 3 business segments. Our overall margin is expected to gradually increase over this period even with considerable growth from our lower-margin GWS segment. The GWS margin itself should also improve over time as higher-margin project management accounts for a larger share of our GWS revenue base. We will continue to manage our balance sheet prudently. We are comfortable with increasing net leverage to around 1 turn as we deploy capital into M&A to accelerate growth. We can even go as high as 2 turns for a highly compelling strategic opportunity. We expect to focus our capital deployment strategy on secularly favorite areas that will further diversify our business. We see significant opportunity to expand our investor, operator, developer model into multifamily, life sciences and infrastructure. Importantly, this model plays to our competitive advantages, including cross-functional collaboration, business line diversification and balance sheet strength, giving us the opportunity to further differentiate CBRE. Given our sizable financial capacity, we expect shareholder capital returns will continue to figure prominently within our capital allocation plans over this multiyear horizon. Ending with Slide 15. Since 2016, core adjusted EPS has achieved average annual growth of 21%, while revenue and free cash flow have also grown at double-digit annual rates over this period. This strong growth has been supported by the strategic steps we've taken to bolster our balance sheet while pursuing a disciplined capital allocation program and increasingly diversifying our business. We expect our multiyear growth framework will extend the successful track record of performance across our key financial metrics. We are extremely optimistic about our trajectory as we head into 2022 and look forward to delivering another year of strong performance. And with that, operator, we'll open the line for questions.

Anthony Paolone:

Great. I guess my first question is just to understand if, I guess, the new EPS metric is going to be core adjusted, what's the EBITDA that ties to that metric? Because it doesn't seem like it's the $1.124 billion.

Emma Giamartino:

And Anthony, I'll just add on core adjusted EPS, the comparable -- we're not reporting a comparable core adjusted EBITDA. So our adjusted EBITDA will include the gains from the SPAC and our venture capital gains. Does that answer your question?

Operator:

We have next question from the line of Alex Kramm with UBS.

Emma Giamartino:

Yes. So we've based our outlook based on what our in-house economist believe will happen in terms of inflation and rate hikes over the next year. And his view is that inflation will moderate through 2022 and 2023, and the federal -- and we'll do a similar number of hikes as the market is projecting to manage that inflation. And so we've incorporated that outlook into our guidance. As we said, we think we have -- we know that we have a number of inflation hedges throughout our business, but there are areas where we know inflation will impact us. And so there are 2 main areas where we've incorporated that. For the half of our global employee base that is not reimbursed by clients, we have factored in wage inflation. And then for our relevant business lines that may be impacted by cap rates, we've assumed some moderation in cap rates throughout the year. And that may be a conservative assumption going forward. And then I do want to say that our outlook does not contemplate the uncertainty and impacts from the geopolitical tensions that are rising throughout the world.

Emma Giamartino:

So throughout our businesses throughout all 3 lines of business, we are investing more to drive incremental growth in future periods. So across all 3 business lines, we're investing about $300 million in OpEx, and those investments are for areas like increasing our capabilities and to serve our clients in GWS, for example, expanding into smart buildings; in advisory, where we are increasing our consulting group to drive future growth. And in REI, we're launching new products in life sciences and infrastructure, which is requiring some investment in 2022. And then you mentioned the 1%. Our margin expectations for this year also include strategic equity grants that we are putting in place to help align a broader set of our leadership team across advisory and GWS, and that's about a $22 million SOP impact across those 2 segments.

Emma Giamartino:

Excluding OMSRs.

Jade Rahmani:

I think on a recent markets call hosted by CBRE, your team mentioned that the company intermediated around $400 billion of transactions in 2021, of which around $80 billion was debt placement. So I wanted to ask in the debt brokerage space how big a priority is growing that business. Do you see that as meaningful? And I would have expected the mix between debt and equity to be closer to equal, so that $80 billion baseline seems like there's a big potential to grow.

Jade Rahmani:

In a normal market environment, leaving aside current geopolitical uncertainty, do you anticipate that the debt business would be closer to perhaps 30% to 40% of the total?

Jade Rahmani:

As it relates to uncertainty prior to Ukraine, there was growing uncertainty with respect to the interest rate outlook and inflation. Are you seeing or noticing any changes in sentiment or tone from customers? You mentioned the very strong first quarter results so far in leasing. But just want to hear what you're hearing from clients that they're getting more cautious if there's any changes in the appetite to transact.

Jade Rahmani:

When you think about infrastructure as an opportunity for the company, is there any further dimension that you could put around that? Do you see it as, for example, core within real estate but expanding the services that are offering or really moving beyond core real estate to areas such as perhaps chemicals, manufacturing, aviation, energy, government? Are you talking about really expanding CBRE's offering into those core infrastructure sectors?

Jade Rahmani:

So you envision CBRE eventually having infrastructure away from core commercial real estate as a key product offering or a business line item?

Jade Rahmani:

Okay. And lastly, within Turner & Townsend, what percentage of their business relates to climate to build the resiliency, energy-related situations?

Robert Sulentic:

And growing. The other thing about that, Jade, and we get that question with regard to our own business. And the answer is not as clean as we would all maybe like it to be when we're answering the question, right? So we have products or services that are directly attentive to green energy, consulting work we do, project work we do. But our green energy work, our environmental work is embedded across our business. It's in our development business, in the nature of the buildings we design and develop. It's in our property management business. It's in our project management business. It's in our Facilities Management business. It's hugely embedded in our -- this massive supply chain we have. So when you look at a company like Turner & Townsend or you look at the work we do, there's direct specific sustainability work, but then it's -- we create advantages for our clients and growth momentum for ourselves due to sustainability-related work we do across all those services.

Stephen Sakwa:

Yes. I guess, Emma, I'm just trying to sort of piece together a bunch of the numbers that you've put out there and what you guys had in the slide deck. You sort of talked about this low double-digit sort of earnings growth from '21 to '25. I realize it's not going to be exactly linear by year. If you just sort of took that at face value, that would sort of suggest you'd be up in the kind of high $5 range, maybe pushing $6 a share. I realize you didn't give the exact EPS guidance, but then you also talked about this $300 million additional investment that you're making, and I realize that's within the margin. So I'm just trying to make sure that when you talk about these additional investments, is that sort of inclusive of that sort of low double-digit growth and so, effectively, you'd be doing a lot more earnings power if you weren't making these investments? Or is that kind of a drag in the short term on that 11 to 12 and you hockey stick a little bit more in, say, '23, '24, '25?

Stephen Sakwa:

Great. And just as a follow-up, as you look at that, do you look at that as sort of a onetime? Or do you think those investments are sort of ongoing, maybe not at those levels? Or I guess, should we start to see margin improve more. And I can understand you got to make the investments today, but should we see better margin improvement, say, in '23 and beyond?

Stephen Sakwa:

Okay. And then just last question. I know you were pretty programmatic on the buyback. It sounds like that will sort of stay in place, maybe accelerate a little bit if the stock sells off with the equity market pullback. But is that -- roughly $400 million, is that sort of embedded in effectively the guidance? Or would the buyback benefits all be additive to that kind of low double-digit earnings growth rate? Just trying to figure out how much of the buyback is sort of already in your expectations and how much would be additive.

Stephen Sakwa:

Great. And then last question, just maybe on that M&A pipeline. I realize you won't name names, but could you maybe just talk about the types of businesses that you're seeing the most activity and where you're most interested?

Operator:

We have next question from the line of Matthew Filek with William Blair.

Emma Giamartino:

So throughout this year, we're seeing -- I think as I mentioned in my remarks, we're expecting recovery across all asset types. Industrial specifically, we're expecting that to slow somewhat as supply has become somewhat constrained. We're expecting office to return similar to how it did throughout the latter half of 2021. And then what was the second part of your question?

Emma Giamartino:

Yes. Lease terms have picked up slightly and continuously throughout 2021. I think new lease terms are up 1%, and renewals are up 4%, but they haven't materially moved. So new lease terms are about 6 years, and renewal terms are at about 4 years.

Robert Sulentic:

Matt, large leasing deals have picked up on the office side, but they haven't -- we're not back to where we were pre-pandemic. Of course, large leasing deals in industrial have been unlike anything we've seen historically. And in the absence system, supply constraint, we would expect large leases on the industrial side to continue.

Alexander Kramm:

Yes. Just could I squeeze in a couple of follow-ups? It should be quick. Just on your medium-term outlook, I think you previously had caveated that with -- does not include a return to office, and maybe that's a couple of quarters ago. But is office embedded in that now? Or what is embedded in terms of office in your updated guidance? So yes, any color would be helpful.

Alexander Kramm:

Fair enough. And then just last one from me. You mentioned the changes to the splits, I believe. I didn't fully catch the comment was impacting, I think, the margin last year. Can you just remind me what exactly you've done there? And then also what the reception has been from, I guess, various parts of your brokerage force?

Operator:

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Bob Sulentic, CEO, for closing remarks. Over to you, sir.

Operator:

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Kristyn Farahmand:

Good morning, everyone and welcome to CBRE’s third quarter 2021 earnings conference call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks, as well as an excel file that contains additional supplemental materials. Please note, we have added some new details to our real estate investment segment tab. Before we kickoff today’s call, I will remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE’s future growth prospects, including 2021 qualitative outlook and multiyear growth framework, operations, market share, capital deployment strategy, and share repurchases, M&A and investment activity, financial performance including profitability, expenses, margins, adjusted EPS and the effects of both cost savings initiatives and the COVID pandemic, the integration and performance of acquisitions and other transactions and any other statements regarding matters that are not historical facts. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning’s earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q respectively. We have provided reconciliations of adjusted EPS, adjusted EBITDA, net revenue, and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanation of these measures in the appendix of this presentation slide deck. Our agenda for this morning’s call will be as follows. First, I will provide an overview of our quarterly financial results. Next, Bob Sulentic, our President and CEO will discuss our recent strategic investments and how they support our four-dimension diversification strategy. Then, Emma Giamartino, our Chief Financial and Investment Officer will discuss the quarter in detail along with our revised qualitative outlook for 2021, our capital deployment activities and balance sheet strength, then we'll open up the call for questions. Now, please turn to Slide four, which highlights our third quarter 2021 results. Total revenue grew approximately 20% to a new third quarter record of about $6.8 billion, while net revenue grew over 28% to nearly $4.2 billion. Notably, all our advisory service business lines, including leasing generated more revenue than they did in Q3 2019. The quarter also benefited from the work we completed last year on our cost structure as well as our continued financial discipline. Overall, GAAP EPS rose nearly 135% to $1.28, while adjusted EPS grew about 92% to $1.39, compared with Q3 2019. These metrics are up approximately 71% and 76%, respectively. Now for deeper insights, please turn to Slide six for Bob's remarks. Bob?

Emma Giamartino:

Thanks, Bob, and good morning, everyone. Turning to Slide 8, let's start with our advisory segment. This segment rebounded strongly from the pandemic's depressed levels of Q3 2020 and performed very well compared with pre-pandemic activity in 2019. In my comments today I will include compared with Q3 2019 for the transactional business lines. We believe this is the best barometer of how these business lines are faring. Advisory services net revenue and operating profits set new third quarter records, surpassing the Q3 2019 peak by 13% and 29%, respectively. This strong performance reflects not only our ability to capture reviving demand for real estate services, but also our diligent focus on managing costs during the recovery. The strong operating profit growth also reflects a $7.5 million gain from our industrious investment. Leasing continued to bounce back strongly, particularly outside of the U.S. with global revenue up 58% from Q3 2020 and 7% from the Q3 2019 peak. All three regions generated leasing revenue above Q3 2019 peak levels, up 4% in the Americas, 20% in EMIA and 11% in APAC. Office demand in the U.S. continues to trail pre-pandemic levels. However, the shortfalls from the 2019 peak levels narrowed to just 16% in Q3 versus 54% in q2. We also continued to see strong small deal performance with revenue from U.S. leasing transactions below $1 million, up about 8% versus Q3 2019. While the contribution from large deals over $1 million remained about 5% below its pre-pandemic level. Property sales activity remained robust. All regions exceeded their pre-pandemic peaks with global property sales up 93% from Q3 2020 and 27% from the Q3 2019 peak. Like in leasing, U.S. office sales activity saw significant improvement coming in just 16% below Q3 2019 levels versus 31% in Q2, and improved investment market also helped generate strong growth and commercial mortgage origination. Revenue rose 41%, from Q3 2020 and 11% from the Q3 2019 peak. Both the government agencies and private lenders were noticeably more active in Q3. We expect the agency's higher lending caps for 2022 coupled with a healthy appetite from private lenders and the attractive yields available from real estate debt to provide a supportive backdrop heading into next year. Strong origination activity helped to drive a 19% increase versus the prior quarter in our loan servicing portfolio, which reached [$300 billion] [ph] at quarter's end, the portfolio growth propelled a 35% revenue increase from the prior year Q3. Valuation revenue accelerated more than 27% from last year's quarter, partially reflecting particularly strong growth in the U.K. and Ireland. Property Management revenue increased 6% year-over-year. Moving to Slide nine, our global workplace solutions segment again posted solid revenue in segment operating profit growth across its global business base. Revenue rose over 8% from Q3 2020, comprised of 21% growth in project management and 6% in facilities management. Total GWS segment, operating profits rose over 16% compared with Q3 2020. Our local client business was a standout performer accounting for a quarter of total segment operating profits. This growth has been driven in part by selective infill M&A. Importantly, despite evidence of increased inflation throughout the economy, we believe our GWS business is well protected by contract provisions that enable us to factor inflation into our pricing annually or even more frequently in certain cases. We are optimistic about the future growth trajectory of GWS. Our new business pipeline is growing, and remains well diversified with representation from financial services, industrial life sciences and technology clients. The pipeline increased markedly from Q2 and is up from both Q3 2020 and Q3 2019. We expect continued pipeline strength as the business environment increasingly settles into a new normal. Turning to Slide 10, our real estate investments segment continued to deliver strong growth, with segment operating profit nearly matching last quarter’s record level. This performance reflects how well positioned our development and investment management businesses are to capitalize on the strong investment climate and the flow of capital into industrial, multifamily, and other favorite asset classes. Global development generated nearly $100 million of operating profit in the third quarter primarily driven by selling industrial properties at high valuations, reflecting acid and tenant quality as well as strong market fundamentals. Industrious comprises the largest portion of our in-process portfolio and pipeline at 35% and 39%, respectively, and we continue adding new projects to the pipeline at a strong pace. This will drive revenue and profit opportunities for years to come. On a trailing 12 month basis, we have converted the average value of the in-process portfolio to operating profit at a rate of 1.9% which is toward the high end of the historical range. Importantly, our in-process portfolio set another new high this quarter, rising to $16.8 billion, largely driven by multifamily activity. Investment management benefited from a record level of asset management fees as well as higher incentive acquisition and disposition fees, compared with Q3 2020, revenue rose 35% to $135 million, while operating profit increased 68% to $49 million. Assets under management continued to grow steadily rising to over $133 billion despite negative currency effects. Industrious and logistics properties remain the largest asset class in the portfolio, comprising more than $35 billion of AUM, or over 26% of the total. Fundraising also remained strong as the performance of our funds and separate accounts attract new capital, dry powder rose 6%, from Q2 to $13.2 billion. Looking at the business as a whole, we're on track to surpass 2019 record performance across all key financial metrics by a substantial margin. On Slide 11, we'll briefly walk through our revised qualitative 2021 outlook. We now expect full year Global Advisory sales revenue to be about 15% above the 2019 peak and globally seem to fall 5% or so short of peak. Q4 will likely see more moderate sales and leasing growth rates than we've experienced the last few quarters as prior year comparisons become tougher. However, both U.S. sales and leasing have been running well ahead of 2019 peak levels thus far in October. Across the rest of our advisory business, we reiterate expectations for low double digit revenue growth on a combined basis. We also anticipate stronger incremental margin expansion than we previously forecast due to the more robust revenue growth. The Q4 net margin should be around the 22.7% achieved in the prior year fourth quarter. We expect the benefit of more revenue from high margin business lines will likely be offset by increased discretionary spending to drive growth and by lower OMSR gains compared with Q4 2020. In GWS, we expect mid-to-high single-digit net revenue growth accompanied by operating profit growth of 20% or more year-over-year. Before contributions from the Turner & Townsend transaction. Our policy is to reflect transactions once closed. Currently, we expect this transaction to close early next week. Given this timing we anticipate the transaction will contribute about $160 million to $170 million in revenue and about $20 million to $25 million in operating profit to our 2021 consolidated results. November and December are usually seasonably light months for the company. For calendar year 2021, Turner & Townsend is expected to generate roughly $1 billion in net revenue at the current spot rate at a similar operating profit margin to their prior fiscal year. Importantly, they noted previously our broader GWS new business pipeline is building and we expect to see the benefit from this in 2022 and beyond. For REI, we have raised their expectations modestly driven by investment management. We now expect this business lines revenue to rise in the low to mid-teens range and its operating profit to increase by at least 30% versus 2020. This includes some incremental OpEx investments slated for the fourth quarter. We continue to expect global development operating profits to roughly triple the $122 million generated in 2019. This reflexive movement of some transactions previously expected to close in Q3 to Q4. We are developing properties and markets and sectors with strong underlying fundamentals and expect to continue monetizing these assets in Q4 and for the next several years. As we've noted in past quarters, corporate segment expenses will be up from both 2019 and 2020 and are expected to end the year at just over 2% of total net revenue. Year-to-date, discretionary operating expenses have been trending well below pre-COVID levels. However, we expect some of these expenses to gradually return as business activity recovers. Flipping to Slide 12, we've strengthened our balance sheet while committing approximately $2 billion thus far in 2021 to long-term growth initiatives, while also returning $188 million to shareholders through repurchases. Trailing 12-month free cash flow generation reached a company record at over $1.9 billion. As a result, we ended the quarter with a net cash position of 0.3 turns and nearly $6 billion of liquidity. We expect to maintain our net cash position in Q4 even with our initial payment for our stake in Turner & Townsend, which will be about $700 million. We will continue to prioritize investments and enhance our diversification, resiliency, and long run growth trajectory. Going forward, we are poised to continue investing in our growth while returning capital to our shareholders and maintaining a strong balance sheet. Our market leading position, the underlying momentum in our business and our substantial balance sheet capacity, make us very excited about our future growth prospects. We look forward to closing out 2021 with another strong quarter. With that operator, please open the line for questions.

Andrew Rosivach:

Hey, everybody, thanks for taking my call. And congrats again for an amazing quarter. One, just really small housekeeping question. You had an increase in stock compensation expense in the quarter. Is that something that's just contractual that's just related to the stock being up 70% this year and the performance that you've had?

Kristyn Farahmand:

And then, hey, Andrew, this is Kristyn, just to jump in for a moment. You're right. The increase in stock compensation expense is basically purely a result of the fact that the financial performance has been so robust.

Emma Giamartino:

Yes.

Operator:

Thank you. Our next question is coming from the line of Anthony Paolone with JPMorgan. Please proceed with your question.

Emma Giamartino:

Yes, absolutely. So I think I'll comment overall on our business, we feel very comfortable that we're well positioned to weather inflationary pressures across our business. I did mention in my remarks that we see a natural hedge within our GWS contracts overall and then we also see a natural hedge in other parts of our business with property management, for example. So within property management, as rents rise, as inflation rises, our revenue in property management also rises. And then, on the transactional side of the business, it tends to benefit from inflation. Given that inflation tends to only happen when the economy is expanding, so across all those businesses, we feel very comfortable that we can weather the inflationary environment. And I will note that the one business that we are monitoring and focused on is our development business. And but what we've seen so far is that the very strong valuations in that business have more than offset any inflationary pressures.