Greetings. Welcome to CBRE's Second Quarter 2022 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Brad Burke. You may begin.

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.

Thank you, Brad, and good morning, everyone. CBRE had an outstanding second quarter with strength across our global businesses. All three business segments posted double-digit revenue and segment operating profit growth despite the significant currency headwinds that affected all U.S.-based global companies. Core EPS was the highest for any quarter in CBRE's history, up 37% from last year's second quarter, and even slightly higher than last year's record fourth quarter. These results reflect the benefits of the diversification strategy we've described in detail on previous calls and an economic backdrop that was still generally supportive despite heightened macro concerns. Highlights for the quarter include a record level of new occupier outsourcing contracts; strong growth in project management, aided by Turner & Townsend; strong growth in leasing; and record real estate development profits. We ended the quarter with excellent new business pipelines across numerous lines of business, which Emma will review. We also repurchased more than $600 million worth of our own shares, the most ever in any quarter, bringing year-to-date share repurchases through July to nearly $1.1 billion. Given the uncertain macroeconomic environment, Emma's remarks will take a different approach this quarter. She will first discuss the long-term positioning of our business before she covers the quarter's results and our outlook for the second half. As we look ahead to full year performance, we are increasing our expectation of core EPS growth to the high teens from our earlier expectation of mid- to high teens. This reflects both our robust first half and several other compelling factors. First, a larger portion of our revenue and profits is generated from businesses that have performed particularly well through downturns. Second, our cost structure is inherently variable. And as we've demonstrated during COVID, we've become increasingly adept at proactively cutting discretionary costs while continuing to thoughtfully invest in growth. Third, our balance sheet allows us to aggressively deploy capital during down cycles through M&A, opportunistic investments in our REI businesses and continued share repurchases. Finally, macro uncertainty creates favorable conditions for market share gains. Occupiers and investors rely even more heavily on the insight, advice and global execution that CBRE is best positioned to deliver. Emma will now discuss all of this in greater detail.

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 three 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 two 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, 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 the short term is not the right time frame to measure the resiliency of this part of our business. COVID-19 created enormous market uncertainty during 2020, much more so than we're seeing today. As a result, the transactional parts of our business saw total net revenue decline 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 during 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 decreased by 16.5%, while our cost of revenue decreased by 16.7%. The remaining costs are operational expenses. Of this, about one-third can be reduced at a rate faster than revenue declines. These costs include travel, business promotion and compensation tied to financial performance. The remaining two-thirds of operational expenses are more difficult to move in the very short term, but reductions are certainly possible over a one- to two-year time frame. In summary, nearly 90% of CBRE's total costs are either directly tied to revenue or are highly flexible in nature. CBRE has 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 three 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 was 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 one-third 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 of $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 in 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 three-quarters of our in-process activity is industrial, multifamily or life sciences products, and we expect continued outperformance over time amid the 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 in-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 drive over 20% SOP growth for the back half of the year, supported by 10% organic growth in local currency and continued strong contributions from Turner & Townsend. In REI, we've already realized around 75% 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, 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.

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?

Absolutely. It's important to note that as we look at the second half of the year, our baseline assumes we enter a recession in the fourth quarter, with some slowdown in the third quarter. We anticipate a mild recession for next year, with inflation beginning to moderate in the latter half of the year and interest rates reaching their peak early next year before rebounding in the second half of 2023. While this is our baseline, there is potential for upside. If our expectations about the mild recession turn out to be incorrect and the recession is less severe than anticipated, that would be beneficial. Conversely, a more significant recession would pose risks. Our guidance indicates high-teens core EPS growth for the full year. Excluding the effects of foreign exchange, we're looking at low 20% EPS growth for the full year, which we see as a positive result for our company. In terms of the three segments, we expect Advisory, impacted by sales and leasing, to see a mid-single digit decline on a local currency basis. Global Workplace Solutions is projected to grow 25% in local currency in the second half of the year, indicating a very strong performance. Additionally, we have successfully monetized over 75% of our profits in the first half, which gives us confidence about the upcoming second half.

Got it. And then on the buyback, you have free cash flow, but you're also below target leverage that you laid out. So 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?

So our capital deployment strategy is unchanged. We continue to seek to reach our target of a turn of leverage, and we'll go up to a turn of leverage when we see an opportunity to continue with our buybacks at an attractive price. We are always prioritizing M&A, but right now, what we're seeing is that there's still a large bid-ask spread in terms of valuations. So we're building our M&A pipeline, as I mentioned in my remarks. And over the next year, especially if a recession continues, we expect to see opportunity as M&A arise. And so we're balancing what we see in M&A with buybacks. And what you can expect for the balance of this year is that we'll continue to aggressively deploy our capital towards buybacks as long as our price remains attractive. In a base case, I think a safe assumption is that we will do another $0.5 billion of buybacks in the second half of the year, but it could easily exceed that.

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 is that how we should think about it?

So those contracts are primarily in our enterprise FM business. We don't disclose what the margin is on those contracts just for competitive reasons. But I think it's safe to assume that those will come in during the latter half of the year. A lot of those contracts have not yet been onboarded since they just closed in this quarter, so there will be a positive impact in the back half of the year. But I think you can use our guidance around SOP growth to help you understand what the margins on that business will be.

So I'd like to talk about advisory sales. We heard from public REITs across asset classes last week that asset values have come in anywhere from 5% to 15%, 20%, and yet we've seen investors basically just undertake more price discovery and continue to sit on the sidelines. So how much more do prices need to come down for transactions to pick back up again? And what else is needed to get that clarity around transactions?

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, and 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 two asset classes that are most attractive and 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.

Got it. And switching gears to office leasing for a second. So you talked about essentially a record number of leases coming due in the next 12 to 18 months. But then how do we juxtapose that with the reality of a tougher economic outlook ahead, in which corporates might think about downsizing their office requirements? And how do you think about that balance? And what gives you confidence around office leasing as we move forward from here?

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 their use of office space to a degree. 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 those renewals are going to get executed or they're going to move into new buildings. 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.

I want to be very clear, Emma, regarding leasing and sales. It seems likely that sales activity will be down year-over-year in the second half. I'm trying to understand if you think leasing will also decline. Are you indicating that both are negative, or could leasing be slightly positive while sales are certainly negative?

Yes, I can provide more details on that. On the sales front, we expect a decline of about 10% in local currency for the second half, with most of that decline anticipated in Q4 based on our pipeline observations. We have good visibility for Q3, which should be flat or show slight improvement. Regarding leasing, we do expect a decline, but it will be much smaller, likely in the low single-digit range on a local currency basis for the second half, which is quite significant and positive. Similar to sales, we expect Q3 for leasing to be stable, while Q4 will experience the majority of the declines.

Great. That's helpful. And then I just wanted to circle back maybe on the development profits. 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 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 as you think into next year?

Yes, Steve, the cap rates have moved, as we noted, 50 to 100 basis points, but they haven't moved any more rapidly than rents have moved. Rents have moved up significantly for both. Again, I'm going to tilt my comments toward industrial and multifamily; rents have moved up mid-teens in multifamily and mid- to upper single digits in industrial, and that's allowed us to deal with the movement in cap rates and allowed us to deal with the movement in costs and protect our profitability. As things go forward, one of the very, very positive circumstances about our development business is that it's very high quality, very well-located, build-to-core product that's financed patiently with great external capital partners. We can decide when to harvest those projects within any rational time frame so that we can optimize across where rents are, where cap rates are, etc. So as Emma said in her prepared remarks, those assets that we have, that $19 billion of in-process development, will harvest. And it will harvest at a time that's relatively opportune because of the flexibility we have and the way we've capitalized those assets.

Yes. I guess just a follow-up. 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 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.

I think people need to see stability, and they need to have some clarity about where things are headed in the future. There is a lot of capital queued up out there to buy those asset classes, and there are a lot of well-leased, well-located assets that can be sold. By the way, we're not the only one on the development side that has the model that I just described that builds very good build-to-core assets that are well capitalized in terms of being patient. Much different than in prior cycles. The industry has moved forward. The industry has matured and become more enlightened about how to capitalize its development. I think people are looking for certainty around where cap rates are going, where inflation is going, and how this drives interest rates. That's when you will see some of the slowdown in sales that we've described turn the other direction.

On the M&A side, how would you prioritize areas of business that you're looking to expand in? Is it spread evenly across the board? Or do you see an outsized area to grow? And last quarter, I think I asked about infrastructure; I'm curious if that is a priority. I know you have some existing footprint there, but how big a priority is expanding infrastructure?

Jade, we look across our entire business, all three 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, etc. 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 are focused on this notion of driving our capital and our resources into areas of secular benefit which are resilient, so we are looking for M&A opportunities that align with that. We have a very definite plan in the various parts of our business. We prioritize certain areas, and if you looked at our M&A pipeline, it would be very evident. We also have this notion that 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.

Second question is on the debt finance side. I know you mentioned that in a declining property sales environment, the debt business would perform better. But overall, is that an area of growth? I believe you recently bolstered the management of the team in commercial and multifamily finance; curious how big a priority growing the debt placement business is.

Jade, growing the debt origination business is a top priority for us, and it has performed exceptionally well. We anticipate overall growth in this area this year, especially in the latter half. A significant factor in this growth is our exposure to the GSEs. As we approach a potential recession and property sales decline with private lending tightening, we expect GSEs to increase their activity, which will benefit us greatly. Our focus extends beyond debt origination; our loan servicing business is also included in our growth strategy. We believe this segment is key to driving growth and providing stability throughout the economic cycle.

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

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