世邦魏理仕集團 (CBRE) 2022 Q4 法說會逐字稿

Greetings, and welcome to the CBRE's Q4 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Burke, Senior Vice President of Investor Relations and Strategic Finance at CBRE. Thank you. You may begin.

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, the 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 a reconciliation 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, 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.

Thank you, Brad, and good morning, everyone. As you've seen, we reported core EPS of $1.33 for the fourth quarter. While down significantly from a year ago, core earnings were slightly above the estimate we provided at the end of the third quarter.

This outcome was driven by several of the more cyclically resilient elements of our business-like outsourcing and others that are secularly favored like project management and the logistics asset class. These businesses, which together comprise about 45% of our core EBITDA grew revenue more than we expected, offset by a slightly larger-than-expected decline in transactional revenue.

Full year core EPS rose 7% to $5.69. This is a solid growth rate considering the more than doubling of long-term interest rates, sharp equity market decline and the credit crunch that constrained investment activity for most of the second half. Notably, we ended 2022 with virtually no leverage, despite making share repurchases, infill M&A and strategic investments that together totaled approximately $2.1 billion during the year.

Looking at the macro environment, cap rates are up 100 to 150 basis points perhaps a bit more for office, and we expect them to expand another 25 basis points or so before peaking likely in Q2. While capital largely remains on the sidelines, we are beginning to see signs of asset repricing helped along by the narrowing of spreads.

Among property types, multifamily and industrial fundamentals should remain strong, albeit with occupancy declining slightly from peak levels and rent growth continuing at a more modest clip than double -- than the double-digit pace set in 2022. Office will remain the most challenged property type as we do not expect occupancy to come close to pre-pandemic levels in the short term.

Globally, we expect significant sales and leasing weakness in the first half before adverse conditions begin to ease later in 2023. Relative to 2022, we expect both Europe and Asia Pacific to outperform the Americas this year. For 2023, we expect core EPS to decline by low to mid-double digits but still to be the third highest in CBRE's history.

As we've pointed out before, this would be a meaningfully better performance than in prior recessions such as the global financial crisis when core EPS decreased more than 60%. In all, 2023 will be a transition year and we feel good about where we'll be when we get to the other side of the downturn. While the macro environment can certainly change, we expect core EPS to grow strongly in 2024 exceeding the 2022 peak and reaching a record level in just the first year after a recession. With that, I'll hand the call to Emma, who will discuss our quarter and our outlook in greater detail. Emma?

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 currencies, 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 net 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 SOPs 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 and U.S. development reflects the timing of asset 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's financial performance will improve going forward. Investment Management AU -- 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 SOP 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 digit 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 to -- these regions to be less pressure than the Americas in 2023.

For property management and valuations, we expect accelerating revenue growth in both lines of business due to recent investments in sales support and tech and acquisitions as well as less FX pressure. Within GWS, we expect low double-digit net revenue and SOP growth with margins increasing slightly as cost savings more than offset inflation and incremental investments to support growth. Our facilities management business is benefiting from new wins and expansions. All major client sectors are expected to grow notably in health care 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 yields. 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 3 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 repurchases, 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 declined because of higher depreciation, amortization and a higher tax rate than in 2022 when we had a number of onetime benefits that will not recur.

Lastly, we expect nearly 2/3 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 implies 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 will not be a recession following the COVID recovery.

The drivers of how we achieve -- 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 meaning to manage through 2 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 brands and our ability to outperform during periods of market -- market weakness. With that, operator, we'll open the line for questions.

(Operator Instructions)

Our first question is from the line of Anthony Palone with JPMorgan.

My first question relates to GWS in 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. And so I just would like to better understand what additional services clients are taking on to maybe offset smaller footprints?

Tony, first of all, even if the work you do for a client in a specific portion of their portfolio is shrinking, it likely would result in project management work, potentially transaction management work, portfolio management work. So even if you have some shrinkage within an account, there are opportunities for revenue.

But secondly, there's the addition of new accounts, which has been very significant for us for the past year, actually record levels, and we're expecting that going forward, where people are giving us more property to manage because they want to save costs. So the combination of those factors have allowed us to grow that business consistently over the years during downturns, and we expect it's going to be a double-digit grower in 2023 for the same reasons.

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 green shoots 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 may be testing the market a bit. I just wondering if you could elaborate on that some.

Yes. And you're asking with regard to property sales?

And leasing, just the more transactional stuff.

Yes Okay. Well, where you're seeing activity in sales is for good assets, even in some cases, office assets, they have -- if they're Class A buildings fully leased. But for sure, industrial and multifamily, if you went back to last year -- even the end of last year, you get a couple of bidders that would test the waters. But now for some of the better quality assets, we're getting several bidders, and they're bidding aggressively and there's anecdotes on multifamily, there's anecdotes in industrial, in particular, where we're seeing that happen.

It's quite a bit different than it was last year. There's a lot of capital that's been in on the sidelines for wanting to acquire assets. There's a lot of asset owners that have wanted to sell assets. And we're starting to see spreads come in a little bit now and the buyers get a little more aggressive in various cases. So that's what you're seeing there.

With leasing, there's continue -- we continue to see very strong fundamentals in industrial. There's low vacancy. There are a lot of companies out there that still need space for a variety of reasons. And so we are seeing momentum there. And then you have -- as we said before, you have a considerable amount of renewal activity around office buildings and retail in particular.

Our next question is from the line of Chandni Luthra Neutra with Goldman Sachs.

Bob, you talked about 2024 EPS recovering to '22 -- 2022 levels at the least. What gives you confidence on such a recovery just given the macro environment and the uncertain -- outlooks that we all have at the moment for the rest of the year? I mean, 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?

Yes. Chandni, I'll comment and then I'll give it to Emma. So first of all, we actually expect 2024 to not go back to '22 levels, but actually -- actually exceed '22. A big part of that is the large portion of our business that's either secularly benefited or cyclically advantaged, all of that outsourcing business, which in aggregate is now quite large. Anything we're doing for the industrial or multi -- multifamily asset classes, we expect to be strong by then. Project management will be strong. We expect that, that business to come back.

So all of those -- all of those circumstances are driving it. Now the thing that would cause it to not happen is if we were wrong about the recession, if the recession was worse -- or lasted longer or started later. But those part -- parts of our business are what we expect to drive that outcome. And Emma, you may want to add to that.

Yes. And 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 a 40% contributor to our SOP. In 2022, it's 45% of our SOP in 2023, that's -- 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.

And then our transactional business lines, we expect them to rebound starting a little bit at the end of 2023 into 2024. And what's important to know about that is that the growth that we are -- 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.

So putting that all together, it's very achievable. And then on top of that, what's not embedded in the 2024 guidance or our outlook is that -- is any sort of material capital allocation or M&A, which would put us far above 2022 levels.

That's very helpful. And that's exactly what I wanted to talk about for my next question but -- more focused on 2023. So in terms of buybacks and just general capital allocation, you talked about using -- you talked about only a modest use of capital in 2023. And that means that buyback is not part of that EPS guide that you've given today. But how would you rank buybacks in M&A in 2023 in terms of priority? And do you think buybacks could look much like 2022 in 2023? And then switching gears to M&A a little bit, if M&A were part -- were to be part of the calculus, could you give us some parameters on what that could potentially look like? How much leverage would you be willing to tap into? And what would be the potential business lines that you would like to explore?

Sure. So when we look at allocating capital, we look at buybacks and M&A in line or weighing, which is a better use of our capital and which can drive a greater long-term return for us. In 2022, you saw that 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 did -- we repurchased almost $2 billion worth of shares and our share price has also been 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 more 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 will 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 2x leverage for transformational deals, highly transformational. We go slightly above that, but that's the range that we're looking at. And 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.

Our next question is from the line of Steve Sakwa with Evercore ISI.

Bob, just circling back on the sales activity. I'm just curious, in your mind, is the pickup -- potential pickup in activity, more a function of the overall level of interest rates or more of a stabilization of rates and spreads where people can actually know where their cost of capital is before they start to underwrite transactions? I'm just trying to figure out which one is the bigger lever, the actual rate or the stabilization of rates?

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 multifamily 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. And 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 2 or 3 circumstances start to line up favorably fundamentals stabilization of rents 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 1 or 2 buyers go into the market, others start to get into the market because they're -- they're afraid they'll be left behind.

Okay. And then secondly, I was just hoping maybe, Emma, could you provide a little more detail on kind of what happened to Telford. I'm not -- it sounded like just maybe cost got out of control. And I just thought maybe you could expand on that a little bit just to make sure we understand sort of the problems. And I guess what's been rectified moving forward?

Yes, absolutely. And so I do want to step back and there's 2 major things going on that are -- are different. So the first is the U.K. has 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, we're requiring all homebuilders who built a building over a certain size over the past 30 years to bring those buildings up -- buildings up to the current fire safety standard. And so as a result, we and all other homebuilders are in the U.K. -- 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 -- 5, 10 years as long as it takes us to remediate those issues. And that's where you see the -- the noncash about the $140 million reserve that we took in Q4.

And 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 very -- over a very long period of time. So we view that as an isolated anomalistic issue that's occurring across all home builders 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 slow -- slowdowns that we've talked about over the past number 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 -- was just shy of $50 million.

And we believe that that's contained. That's a -- that's a very good estimate of -- 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.

Okay. And are you -- I just wonder, are you seeing any green shoots at all in the U.K. housing market from a demand perspective? Or has that not yet started to -- to pick up?

A little bit, Steve. The -- I mean 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.

Our next question is from the line of Michael Griffin with Citi.

Maybe we can go back to leasing for a second. I'm just curious how your strategy around that might be changing just given the longer-term implications that remote and hybrid work could have on -- on performance and impacting the space. I think, Bob, you've talked about expanding in industrial. So maybe just how thoughts around that changed? And if you could remind us just what percentage of that -- of the leasing revenue comes from -- from the office sector, that would be helpful.

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

It is about a little over 50%. And that's come down. If you compare that to 2019, for example, it was closer to 70%. So that -- that has steadily come down.

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 since we returned to office. We've built a plan for the next several years. It 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 in the -- other than in the last year than it has in the longer-term past. And we don't see that changing. And the comments that Emma made about our plan for the next several years, our growth plan fully incorporate that view.

That's helpful. And then just one on geographic, performance. It seems like your commentary and expectations around EMEA and APAC are maybe a bit incrementally more positive relative to the Americas. I'm just curious if there's anything driving those underlying assumptions. Is it thoughts about economic growth or potentially shallower recession there, but anything you can expand on performance of those other geographic segments? That would be helpful.

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.

So, 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.

Our next question is from the line of Jade Rahmani with KBW.

First question would be if the move in rates in the last couple of weeks has changed -- has changed anything in terms of tone from major CBRE clients that you're hearing?

I don't think it's had a major impact, Jade. I mean everybody is in the -- of the mindset that things are going to be uncertain for a while. I don't think we 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.

When you look at the REI business overall, investment management and development. How much risk of further impairments do you anticipate -- valuation impairments? You mentioned you expect cap rates, for example, to increase another 25 basis points. But could you put some parameters around perhaps how you're thinking about any risk there?

So Jade, Emma. I'll walk through the development first and then our investment management business. On the development side, any impairments, and we don't think there should be significantly more of 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 of $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.

Just regarding the guidance, how much does capital markets and leasing picking up in the back of -- half of the year drive the guidance? Is that really the main uncertainty in the guidance?

Yes. And it's primarily capital markets that we're really expecting to pick up mostly in Q4. And just to get 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 $0.02 EPS impact.

And then on the leasing side, we don't -- we're not relying on a massive rebound in -- 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 I said -- and then 2 -- And on the sales side, I mean 2% change to EPS.

Okay. Great. That's really helpful to have. On the office side, is the uncertainty there, which seems secular in nature causing a rethink of -- I guess, resource allocation in that space, in that property sector? And any rethink of how that outfit is organized?

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. And 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 a slightly 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 the build-to-suits that will continue to be part of our business, and that's a great business -- when you can do office build-to-suits with credit tenants and that's what we would do.

And then -- over time, there'll be -- 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.

Our next question is from the line of Patrick O'Shaughnessy with Raymond James.

I was wondering if you could speak to -- how you're thinking about free cash flow conversion as a percentage of your core net income in 2023.

Yes. So we expect it to be roughly in line with where we were in 2022, which was about 75% free cash flow conversion. And what's important to know about -- note about that is because we're in a somewhat of a war in a declining market, the -- there is inconsistency and timing in terms of how we accrue our bonuses and how we pay them out in cash.

And so 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 -- so we should expect coming into 2024 -- that we should be in a more normalized growth environment in that mid-80% free -- free cash flow conversion range.

Got it. What are you guys seeing right now in terms of talent retention, given kind of the slowdown in some of the brokerage areas? Are brokers more inclined to -- to want to move from place to place? Or do you feel like you are able to retain all the key talent that you want to?

This is kind of an 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 -- they pay attention, the more sophisticated brokers know that they know we'll be able to continue to invest in our business. So 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.

Great. And then last one for me. Your in-process development projects decreased pretty substantially quarter-over-quarter, and there was some commentary about, I think, just some reticence given the macro landscape. How are you looking at that as we move into 2023? Could it slide a little bit further in the near term? Or would you expect that to start to rebuild?

So our in process -- just to frame what our in process is, that is that is projects that have either started construction or we own the land, and it is expected to start construction within 12 months. So the decline is primarily driven by projects in that latter category that we now believe are going to be more than 12 months off.

Until 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 not the 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.

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

Thanks, everyone, for joining us, and we look forward to talking to you again when we report on our first quarter.

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