CBRE Group Inc - Class A (CBRE) — Q3 2018 Earnings Call Transcript

Thank you, and welcome to CBRE's third quarter 2018 earnings conference call. Earlier today, we issued a press release announcing our financial results, and it is posted on our website, cbre.com. On the Investor Relations page of our website, you will find a presentation slide deck that you can use to follow along with our prepared remarks. This presentation contains forward-looking statements. These include statements regarding CBRE's future growth momentum, operations, market share, business outlook, investment levels, and financial performance expectations. These statements should be considered estimates only, and actual results may ultimately differ from these estimates. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to our third quarter 2018 earnings report furnished on Form 8-K and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q. During our remarks, we may refer to certain non-GAAP financial measures, as defined by SEC regulations. Where required by these regulations, we have provided reconciliations to what we believe are the most directly comparable GAAP measures. These reconciliations, together with explanations of these measures, can be found within the appendix of this presentation. Additionally, all growth rate percentages cited in our remarks are in local currency unless otherwise stated. Please turn to Slide 3. Participating on our call today are Bob Sulentic, our President and Chief Executive Officer; and Jim Groch, our Chief Financial Officer and Head of Corporate Development. Now, please turn to Slide 4, as I turn the call over to Bob.

Thank you, Brad, and good morning, everyone. This is an exciting time for CBRE. We continue to advance the company on multiple fronts while driving strong results for our clients and shareholders. As you've seen from our press release, we delivered double-digit increases on the top and bottom lines. The 14% fee revenue growth was led by particularly strong performance from our leasing business. This is reflective of deep relationships with our large occupier client base and our ability to attract the industry's top professionals to our increasingly differentiated operating platform. Occupier outsourcing again had excellent growth fueled by the secular shift toward outsourcing and CBRE's globally integrated capabilities. Our development services business had another strong quarter and is on track for record profits in 2018. I also want to comment on two important strategic initiatives that should have a big impact on CBRE. The first is the reorganization of the company, which we announced in August. We have clarified lines of authority for our management team, which will increase accountability, introduce operational and cost efficiencies, and enhance business line quality across our business. This new structure will also increase financial transparency for our company, and we hope promote greater transparency across our sector. The second initiative was the introduction yesterday of our flexible office space offering called Hana. This service evolved from a tremendous amount of interaction with and encouragement from our clients. Our deep relationships with property investors and occupiers and what we've learned from our workplace experience service CBRE 360 position us well to succeed with this new offering. Hana is perfectly suited for property owners who believe they can add value to their buildings with the flexible space solution that keeps them in control of their assets and for companies that want more flexibility in their occupancy to meet changing business needs and create a better workplace experience for their people. This is a rapidly expanding market that could comprise 5% to 10% of the total occupied space within a decade. We have assembled an exceptional team to capture this opportunity and kicked off our marketing efforts yesterday with a robust deal pipeline. Hana will operate as part of our real estate investments business beginning in 2019. Now, Jim will take you through our third quarter in detail.

Thank you, Bob. As Bob noted, CBRE delivered another quarter of strong growth. Fee revenue increased 14% driven by 10% organic growth. Adjusted EBITDA rose 12% and adjusted EPS grew by 22% both in US dollars. Fee revenue for our combined regional services business increased by 13% with adjusted EBITDA increasing 6% both in US dollars. Adjusted EBITDA margin on fee revenue for our regional business declined one percentage point versus the prior year quarter to 15% consistent with our guidance at the beginning of the year. As you will recall, we outlined a significant investment program for 2018, as we reinvested the savings associated with tax reform, but for these investments, adjusted EBITDA would have grown faster than fee revenue. Additionally, adjusted EBITDA margins on fee revenue for our regional services business would have been approximately 40 basis points higher, absent the impact of FX and the acquisition of lower margin but typically high growth outsourcing businesses. The impact of FX was notable in Asia-Pacific, where adjusted EBITDA would have increased by 7% excluding all FX effects rather than declined by 4% in US dollars. I do want to emphasize that we continue to expect positive operating leverage in our regional services business in 2019. I should also highlight that we continue to expect a record adjusted net income margin on fee revenue for full year 2018. For Q3 2018, our adjusted net income margin on fee revenue increased by 80 basis points to 10.3% versus Q3 of the prior year. Below the line, our tax rate of 23.5% for the quarter resulted in a $4 million reduction to tax expense versus the prior year, while depreciation and amortization expense increased by $11 million. M&A was active in the quarter. We completed four acquisitions, highlighted by the purchase of the remaining 50% ownership in our long-standing joint venture CBRE/New England, the leading provider of commercial real estate services in Boston and throughout New England. Slide 6 shows our revenue growth by line of business for Q3. Leasing realized double-digit revenue increase across all three regions. Leasing in the Americas grew 19%, with 15% organic growth on top of 14% overall growth in the prior year. Strong performance was broad-based across countries, property types, and varying transaction sizes. In EMEA, leasing growth of 18% was paced by France and the UK. Leasing rose 16% in Asia-Pacific against a tough comparison, helped by several large deals in Greater China. Our debt businesses again posted strong growth, with commercial mortgage origination revenue up 22% and loan servicing revenue up 21% on a portfolio that grew to a record $196 billion. Growth was particularly strong in multi-family lending. Global property sales revenue rose 5% led by EMEA up 24%. Germany was a standout in the quarter driving over half the growth in property sales revenue versus the prior year. We also saw double-digit growth in our UK business, which continues to benefit from inbound foreign capital. Double-digit growth in UK property sales and leasing speaks to our ability to gain market share, despite the uncertainties around Brexit. Americas property sales growth of 2% was paced by a 7% increase in the United States, offset by weakness in Canada and Latin America, which both experienced exceptional growth in the prior year Q3. In Asia Pacific, sales revenue declined 5% versus a very difficult prior year comparison. Property management fee revenue growth of 8% was supported by continued double-digit growth in our outsourced accounting and reporting offering, which we discussed briefly during our Investor Day. Slide 7 highlights our occupier outsourcing business. Fee revenue increased 16% globally, and all three regions produced mid-teens growth in local currency. We also had another particularly active quarter of client wins and expansions. This quarter, I'd like to highlight CBRE's continued inroads in the management of critical facilities such as data center operations. Our data center management offering is set to grow revenue by over 50% in 2018. CBRE's data center initiatives fit squarely in our outsourcing wheelhouse. Managing data center facilities requires a proven track record and deep technical expertise. Additionally, data center owners increasingly desire multi-market solutions requiring the ability to execute at scale. CBRE manages approximately 75 million square feet of data centers around the world. By example, Lincoln Rackhouse, a rapidly growing data center business recently retained CBRE to manage data centers in key US markets. Our role is to manage the daily operations of the facilities, perform preventive maintenance on critical systems, and manage capital projects. In selecting CBRE, Lincoln Rackhouse cited our knowledge of mission-critical facilities, strategic insight, speed to market, and consistent execution. This business is also highly synergistic with our specialized data center transaction business and has excellent momentum with a robust pipeline. Slide 8 summarizes the results for our Global Investment Management segment. This business raised a record $4.1 billion of capital in the quarter and $10.7 billion over the last four quarters. Assets under management increased by approximately $3 billion from the prior quarter. Adjusted EBITDA totaled approximately $11 million versus $23 million in the prior year. The decline in financial performance was primarily impacted by the following three items. First, our public securities business remains under pressure from a continued industry-wide shift in investor preference toward passive investment vehicles. Second, Q3 EBITDA was negatively impacted by a $4.5 million charge resulting from a legacy employment agreement associated with the valuation of our public securities business. We do not expect a similar related expense going forward. Finally, we have invested in new talent and new offerings to drive future growth. Specifically, we have built a new team to raise and manage the debt funds and have also invested in new talent to expand our overall fundraising capability. Compensation expense associated with such activities is incurred upfront, while the revenue from additional assets under management will follow in future periods. Though it was a challenging quarter for this business, we continue to drive strong performance for our investors and they, in turn, trust us to manage more of their assets. We are keenly focused on improving the long-term profitability of this business and we expect better financial performance over the next four quarters. Slide 9 summarizes the results for our Development Services segment. Development Services, which operates under the Trammell Crow Company, is a high-quality business with relatively modest capital, where debt guarantees are at risk. A valuable brand often recognized as the top developer in the US and a differentiated and defensible strategy. Our combined in-process and pipeline portfolio once again reached a record totaling $12.4 billion. EBITDA of $77 million in Q3 was driven by a couple of larger than normal asset sales, while this EBITDA can be volatile on a quarter-to-quarter basis, Development Services has consistently contributed to our profitability with adjusted EBITDA since 2008 totaling just over $800 million. Before I turn the call back over to Bob, I want to note that instead of providing our detailed 2019 guidance when we report Q4 results, we will do so three weeks later at our Investor Day on March 7th in New York City. At that time, we will walk through the financial details of our new reporting segments, as that is the basis we will be using to give guidance going forward. Now, please turn to Slide 10 for Bob's closing remarks.

Thank you, Jim. Before opening the call for questions, I want to take a moment to address the broader economic environment. Investors have clearly been concerned about the effects of higher interest rates and trade tensions. However, commercial real estate fundamentals have been resilient in the face of higher rates. There is more than ample debt and equity capital available for commercial real estate, and cap rates have not increased in any meaningful way. As we've often noted, interest rates are important, but the more important drivers of our business are underlying economic growth, job creation, capital availability, and overall allocations to the commercial real estate asset class. These drivers remain favorable, as evidenced by our results this quarter. In addition, escalating trade tensions do not appear to be impacting our overall business. However, continued escalation could impact business sentiment, most notably for select markets in Asia, which combined, typically represent approximately 2% of our adjusted EBITDA. Given our strong performance year-to-date and our favorable business outlook, we anticipate full year 2018 adjusted EPS coming in at the high end of our guidance, which we increased last quarter to a range of $3.10 per share to $3.20 per share. With that, Operator, we'll open the line for questions.

Thank you, and good morning. My first question is with regard to the margins in the regional businesses. Can you just talk to just what the order of magnitude is in dollar terms that you've been spending like, for instance, in the third quarter that was a drag on margins and how to think about that either going away or this is the new baseline or how that works going forward?

Sure. Anthony, this is Jim. How are you today?

Great. Thanks.

Yes. The margin. The first thing I'd say is on the investments, we've done exactly what we said we were going to do at the beginning of the year. We've reinvested the savings from tax reform back into the business, into our people, technology, cost savings initiatives, and initiatives to drive growth. The total incremental cost of these in Q3 had a little over a $30 million impact on EBITDA. So without those investments, EBITDA growth would have been in the mid-teens. As far as how to think about that going forward, I think thinking about these investments as more of a baseline within the business is the right way to think about it.

Okay. Got it. And then, if I look across particularly like investment sales and probably leasing as well, it seems like the percentage growth was very good in Europe, particularly, and like the US against the RCA data. So I'm just curious how much of that you think is market share gains versus things like buyer or user representation or just doing other sorts of things that are driving growth?

Yes. Tony, it's Bob. Well, you mentioned both capital markets and leasing. I'll start with capital markets. We think we took a lot of market share in Europe and Asia, and we think the quarter was for us, in terms of market share, was kind of in line with what went on with the industry. But around the world, globally, we took a lot of market share. We've taken significant market share, as you know, over the last couple of years. And we think that our capital markets team has done a really great job of connecting around the world to move the capital quickly to where the best opportunities are and to get in front of our clients with that connected capability. It's been a big difference-maker for us. On the leasing side, there's a couple of things going on, and I think it's coming through in our occupier outsourcing numbers and our occupier leasing numbers. We have a very good, very connected product for occupiers enabled with a bunch of consultative capabilities, and we're able to provide solutions for them. It is increasingly hard for the competition to do that. We are taking market share around the world in the occupier business on the outsourcing side, on the leasing side, and the numbers were pretty resounding this quarter in all three regions of the world in that regard. It's worth noting that the global economy is in good shape and commercial real estate is in good shape and the customers we serve have strong balance sheets; they're growing and investing in their businesses. So there's a whole lot of good stuff happening there.

Okay. Thanks. And then lastly on Hana and that initiative. Can you give any brackets around things like how much money you expect to invest in that timeline to perhaps profitability? How big that business might be in 2019 on a square footage basis? Just any other detail around there that you could provide?

Sure, Anthony. We will unpack that more at our Investor Day and a lot of it will depend on kind of the rate of the rollout, and this is a really important initiative. But just to give you some perspective, we're penciling in $50 million to $60 million of CapEx investment in 2019. Typical facilities should take 12 months to 18 months to breakeven, and we expect strong returns on our capital to deploy.

Okay. And is this something where you will be going at this in terms of putting up the money alone or will you partner with landlords? How will that work?

Yes, we have a rapidly growing business in flexible space. Our model is somewhat unique as we plan to partner with landlords rather than lease space. We will contribute a portion of the capital, the landlords will contribute another portion, and we will share in the leasing revenues. We will handle the operations, leasing, and build-out of the space for them. This product was developed in close collaboration with several of our investor and landlord clients to meet their specifications. We have a solid backlog of potential deals that we will be discussing, and we believe that landlords are quite enthusiastic about this product.

Okay. And is the anticipation that the user of the product will be individual workers with the membership like a co-working situation or is this more of an enterprise solution for a business that needs some flexibility, and you'll work with the landlord to provide that to that customer?

Dramatically skewed toward enterprises. About 5% to 10% of the space of each Hana facility will be dedicated toward co-working, kind of traditional co-working. There will be some space in there that's amenity space and conference rooms, et cetera, but this is for enterprise clients. And by the way, this is one of the reasons that the landlords were excited to work with us. We manage a couple of billion square feet of office space around the world with 9 million people in it. We have a real connection to those occupiers, and we know a lot about what those occupiers want, and we think that's going to help us be successful with this initiative.

Good morning. I'm just curious given kind of the increase in negative sentiment in the marketplace, has that affected at all the occupier outsourcing business, the aggressiveness of some kind of corporate and institutional orders to pursue occupier outsourcing business with you?

Our occupier outsourcing businesses experienced mid double-digit growth throughout the year, and we anticipate this trend to continue. Regarding market sentiment, I believe you are referring to the stock market sentiment. The economy is performing well, and both consumers and companies are feeling optimistic. We are witnessing strong growth in that sector, and we expect it to persist. Historically, even when market sentiment declines, there is still potential for growth as companies look to cut costs, and we assist them in saving money through our outsourcing services. However, we are currently not observing any negative sentiment.

Yes. I guess, in theory, even in a tough environment, the business should do well, just an opportunity for your clients to save money. But I'm just curious if you anticipate if we have some type of commercial real estate sales downturn, does that business kind of decline just for sentiment reasons or other?

We haven't seen that historically. We haven't seen that market be tied at all to commercial real estate sales, and that's not our expectation.

Got it. And then just circling back to some of the strength in the multi-family lending. I know there is the potential for housing reform early next year, although that's been bounced around for the past couple of years. I guess, just kind of thinking about what risks there might potentially be or what potential benefits there might be with some type of change in GSE lending?

Yes, of course, Jason. As you noted, Mel Watt's term is coming to an end, and there will be a new Director. There are reasons to believe that the new Director may adopt a more conservative stance regarding their scorecard. We can foresee minor reductions in caps based on the definition of what is excluded from them. However, we anticipate that any changes will be implemented gradually and with careful consideration. Therefore, we expect to see some modest downward pressure, but that is our perspective.

Got it. And last question from me, just circling back to Hana. To your knowledge, have you seen kind of any other corporate players partner with landlords to try to figure out a solution to co-working space that's not your typical, WeWork, it's more geared toward kind of the enterprise and corporate client?

There are others that are doing it, Jason. And one comment that I think is worth making here, this whole environment that we're in now, where office occupiers are looking for a different experience and for flexible space, this has been really good for our industry. I think it's one of the reasons that you've seen strong leasing growth from us. But in general, good leasing growth from the region. Office experience is one of the things that companies are using in the battle for talented employees, particularly tech employees. A lot of different ways that people are coming at this. We think the way we're doing it in partnership with the landlords is unique. I wouldn't be surprised if others do it. But it's a market today that takes about 1% of the base of the space out there of flexible space, we think that's going to grow to 5% to 10% probably, the higher end of that range. It's a big opportunity for us. And again, because of our position with landlords and, in particular, our position with occupiers, we think we're in a really good place to take advantage of it. And here's the statistic for you that just we haven't talked about a lot, but we've done hundreds of leases representing occupiers going into flexible spaces here. So that is a big and real market.

Hey, thanks. Good morning. On capital markets, EMEA sales were up over 20%. I was wondering how UK did in particular, and has there been any hesitation in the market once again coming out of the latest Brexit discussions?

Well, UK was one of the strong points in EMEA and London was strong; there's a lot of Asian capital interested in London. The London marketplace is what it's been kind of forever. It is a really, really important place for global capital to go to invest in real estate, and we've seen strength in the last 90 days. We expect good things to happen. There is nervousness around Brexit and we're watching that closely. But London and the UK were certainly strong in the third quarter.

In September, Jim you talked about a bit of easier 3Q comps for EMEA sales being a factor; obviously, 4Q last year was a record quarter. Do you anticipate being able to reach those levels once again?

Alan, I just want to make sure I understand your question. Is it whether or not we think we can continue to have growth in Q4 against tougher comps?

Yes. That's right.

Yes. We're still expecting strong growth in Q4. And we've achieved strong growth in Q3 against some tough comps as well. Q2, we had a couple of regions where the comps were a little crazy, where the prior quarter had been up 40% and even 80%.

Yes. Good morning. I guess first here in occupier outsourcing, you're continuing to see really solid growth there. But it seems like it might have slowed down more than at least we had expected, especially with the benefit of FacilitySource. So what did organic kind of local currency growth look like in that business, and am I right in thinking there was a slowdown in growth, particularly in the Americas? And then second, any update to your target of getting FacilitySource to, I think it was about $270 million run rate revenue by the end of this year?

We believe we are on track with our projections for FacilitySource in terms of gross revenues, which has a smaller impact on fee revenue than anticipated. Overall growth has been stronger than expected. At the beginning of the year, we forecasted solid mid-teens growth, and we are currently at 18% year-to-date. For organic growth, we have achieved 12.5% year-to-date, with 9% in this quarter. This can fluctuate between quarters. We expect solid double-digit growth in Q4, and I estimate organic growth for the year will exceed 12%. The growth has been consistent and robust, despite tougher comparisons this year due to accelerated growth last year.

Got it. That's helpful. And then how are you thinking about CBRE's opportunity in healthcare at this point? You completed the now being Noveen Consulting acquisition. So I guess, what did that add for you? And will the opportunity in healthcare be an increased area of focus here over the next few years?

Stephen, healthcare is one of the verticals that we really focus on with our occupier outsourcing business. There are a huge number of hospital systems around the US and obviously around the world. We've got a very good foothold in that business. We serve a lot of those hospital systems, but the penetration so far has been very small. We have a very strong healthcare capability. What we're seeing in healthcare is what we've seen in other areas of the business, financial services, technology, et cetera, when you start to have outsourcing happen and the population of participants in a sector sees the cost savings that can come from that, the efficiencies that can come from that, then it starts to roll out across the sector. We're seeing a lot of momentum in healthcare. It's a big part of our future in that business. We have built the capability to address that opportunity.

We see economic risk on the co-working venture, is that with the landlord? And then maybe second, will you guys be able to realize some incentive fees, if certain thresholds are achieved?

Our approach is to partner with landlords for these facilities. We will invest some of the capital, while the landlords will invest a larger portion. We will share the rental income according to our respective investments. We will construct, manage, and lease the space on behalf of the landlords, but in this model, we typically do not assume leasing risk. As mentioned by Jim, we have outlined our expected total capital investment for the upcoming year, and this is the model we are adopting. Landlords find this model very appealing as it allows them to maintain control over the space and tenant base while also providing them with the potential for profit, which we will also benefit from.

Got you. That's helpful. Shifting over to development and I'm fairly certain most of that activity is happening here in the US. Have you guys shifted the way that you're underwriting some of these co-investments now in terms of your participation in some of these deals and/or the newer deals I should say, maybe any regions or asset classes that you're getting a little hesitant toward participating in?

Mitch, we have a very intensive asset-by-asset underwriting process that we go through, and in each local market, whether we're doing an office building, a multi-family building, warehouse building—which by the way are our three biggest product types—we also do healthcare and a little bit of retail. We look at the local submarket circumstances and then the macro circumstances around that as we underwrite these assets. It's something that we do very intensively; nothing about that has changed. And in general, the markets around the US—and it is a domestic US business for us today—the markets around the US remain healthy. There's not a lot of vacancy. Unlike any cycle we've seen in my career, there's not a lot of circumstances that appear to be overbuilding. But we continue to underwrite these assets very rigorously.

And Mitch, I would just add. We've got a total of $92 million of co-investments in and total recourse repayment guarantees and outstanding debt balances of $8 million on the $12 billion that's in process. So this is—we're not changing the way we approach the business at all, and the capital structures are pretty conservative.

That's helpful. And then I think my last question. Bob, I'd love to get maybe sort of a greater discussion about the reorganization that was announced in August. Certainly, you guys have been an incredibly successful company over the last decade or more. So some would argue was it necessary. I just love to gain some insight regarding yours, maybe the Board's thinking toward this change and what to expect from it?

Well, it's the first question I get as I go around the world and talk to our people: why change? It was the first question I got from our Board. Things are going well. We're in our ninth year of double-digit earnings growth; we've taken market share; our clients are happy and getting happier. So why change? And the reason for it, Mitch, is the following: If you don't change, the world around you is going to change and start to impose some failure on you, then you're going to be changing from a point of weakness, not strength. We're in a very strong position today, but we saw opportunities to do some things better. We had a real opportunity to put some super compelling leaders in more impactful positions, and we got that done. We had an opportunity to have greater lines of clear authority in our business with greater accountability. We for sure have gotten that done. We’ve put more emphasis on the quality of our product lines, which is really good thing for our clients. We’ve put more emphasis on our client care program, a really good thing for our clients. The marketplace that invests in our stock wanted to have greater transparency into the performance of our various lines of business, and in particular, in our outsourcing business, we've done that. We think that's going to force greater transparency in our whole sector. Another thing we're getting out of this that's important is we're going to be more efficient, more cost-effective as an enterprise. So those are all the things that drove this. We're a couple of months into implementing it, and we're very, very encouraged about what we're seeing.

Thanks very much. In terms of the real estate investor talent, what do you think the appetite for continued growth in acquisitions and refinancings will be in 2019? I've seen several surveys showing continued growth in investor allocations in terms of the targets?

Yes. Yes. Jade, this is Jim. We are seeing a very healthy market. Our pipeline in the mortgage origination side is as strong as it's ever been. Spreads on the debt side getting tighter, I think are an indication that the bid-ask spreads are coming together as well on the acquisition side. So the market feels healthy and balanced and with a good bit of liquidity. At the same time, it seems not getting overheated. It seems that the discipline is still there.

In terms of the number of bidders on transactions, how has that been trending over the past couple of quarters?

Jade, the fact of the matter is, there is an awful lot of capital out there looking for acquisitions. And by the way, some owners of acquisitions that might otherwise sell are not exiting assets because they can't find replacement assets. So there's plenty of bidders for — there is plenty of debt, and there's plenty of equity for the assets that are in the marketplace, and that's why you continue to see a healthy market.

When you look at the outlook for 2019, what do you think poses a greater risk: the potential increased interest rate from the Fed's actions or that the ongoing trade tariff issues?

Yes. I don't think either of those are our biggest risk right now. We're watching both of them closely, and there's some concern about both of them in the market. I think the bigger risk is we're in a good global economy, and the tech companies and the other companies that really value talent continue to hire. I think the—and unemployment here and in other countries is low. I think the bigger risk is that it may start to get tough to hire employees and that may force some inflation that could create some issues eventually. That's probably what we line up as the biggest concern right now. But again, we're watching interest rates and trade circumstances closely.

The commercial lending business has been an area of outperformance lately. I was wondering if you have any insight or data about what the in-place cost of that is for holders of commercial real estate. I think according to the MBA, there have been about 3 trillion of commercial real estate originations this cycle, and something we've seen played out in the residential market is that the weighted average cost of borrowing in place is much lower than current mortgage rates, and that's starting to impact transaction volumes. Do you have any concerns about that playing out in 2019?

I think the expectations through for 2019 are largely baked in today, and obviously we've seen rates go up, but that's been at least partially offset by compression in the spreads. So overall activity still feels like a pretty healthy environment for activity. And I think the commercial side is—it does have some differences, obviously, from the single-family home side. But all of this is based on what we expect in the marketplace today; if things changed materially from that, then that would create a new situation.

On the leasing side, do you view the last two quarters of acceleration as sustainable?

Well, look, I don't suspect that we're going to indefinitely be able to grow our leasing business at mid-teens plus rates. But we do think that the economy in the US and the economy around the world is good. We do really think that we have a solution for occupiers, an integrated solution, and a solution for tenants looking to lease space that puts us in a position to effectively grow market share. So we expect to see good strength out of that business going forward. What we saw this quarter was a pretty special result.

In terms of the reorg, do you think that it is expected to drive increased coordination between key producers at the business line level? Should we expect teams of investment sales, mortgage brokers, and leasing producers to go in on deals together? Is that going to be a big initiative?

One of the key things that we wanted to get done with that reorganization was to strengthen the line of business side of our matrix, that's the side where we have our capital markets leadership, our advisory and transaction services, which is our tenant leasing leadership, our valuations leadership, our project management leadership, et cetera. The goal of that group is to bring the CBRE enterprise to our clients. And then, of course, we have this client care initiative that helps us get that done as well. We absolutely expect to accelerate our ability to bring the enterprise to solve the needs of our clients under this new organization. That's one of the key goals.

And just turning to the M&A pipeline, where you're seeing the most interesting opportunities, if you could make any characterization by business line? And also, if there were a large-scale opportunity, what businesses do you think it would be likely to be in?

Sure. Well, as you might expect, I won't get that specific. The larger opportunities come along when they're available every few years. The pipeline on M&A remains strong. I mean we're really opportunistic, I would say around looking for the very high-quality businesses that bring leverage to our platform and that can be, frankly, that can be in any of our lines of business in pretty much any region in the world. But we've been at a pretty steady pace; the market feels rational, and you've seen us pull out when it's not rational. Right now, I think it's kind of in a good place.

Hey, good morning, guys. So you talked a lot about the owners, and you also run your own investment management and development operations. So what's your take on why cap rates haven't meaningfully moved up so far?

Well, it's not something recent quarters obviously; it's been going on for several years now. I think I'd offer a couple of points. One is that the spreads on cap rate — the spreads versus say 10-year treasuries or BBB bonds, whatever you want to look at—are generally not far from the midpoint of where those spreads have been historically. So while we've seen interest rates come up a bit, the spreads have compressed. I think fundamentally, at the end of the day, real estate is a reasonably priced asset class as compared to other alternative investments. And the markets—strongly development has been in check—with that, you have rational, reasonably the rental increases over time will continue. I think the increases have been absorbed with some spread compression.

Got it. That's helpful. Thanks. And then your net debt-to-EBITDA 0.8 times at the end of the third quarter, your valuation is at relative lows right now. Are you at a point where you might start to think about share repurchases, or do you still feel like you have better uses of your excess capital?

Well, we have invested virtually all of our free cash flow over the last few years around M&A. What I'll say, though, is that we've been in a blackout period since mid-September; had we not been, we would have been buying shares under our existing authorization.

Thank you. So CBRE had a couple of high-profile recruits recently. Wanted to touch on how headcount has trended in leasing and capital markets, either year-to-date or what you're targeting for 2018?

Well, David, we've had a really good year for recruiting, and our recruiting is tracking ahead of last year and ahead of our expectations for this year, and we expect that to continue. What's becoming clear to us as we recruit is that these professionals want to come to a place where they can do more for their clients, and there's just no doubt, based on the results we're having that they're seeing that here; that our platform, our technology, our consultative tools, our ability to connect to serve clients around the world, is making it easier and easier for us to bring people on board.

Great. And then, I know this is a tough one to ask. But within your growth in leasing over the last 12 months, you're clearly growing mid-teens. Any way to conceptualize, how much of that is coming from these differentiated offerings, from cross-selling occupier outsourcing clients, for example? Or said differently, why do you think the market has been growing over the last year or so? And how much market share you're been taking?

Well, in this quarter we know that we grew probably 10 points faster than the market grew. We know that something like half of the new leasing work we're doing is account-based. We know that account-based work comes because of our platform, because of our capabilities around the world, our ability to bring different products to these clients. So there is just no doubt, it's a differentiator in attracting clients. It's also a differentiator, you know, and the answer to your first question, in attracting talent, which of course, then you circle back, and because of that talent, you attract more clients. So I think it's all working together. Our occupier business is really strong. Our outsourcing business and our advisory and transaction service tenant leasing business are really strong, and it's all working really well together.

Thanks everyone for being with us, and we'll talk to you in about 90 days when we report our year-end results.