CBRE Group Inc - Class A (CBRE) — Q2 2024 Earnings Call Transcript

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

Thanks, Chandni, and welcome to CBRE. Good morning, everyone. CBRE had a successful second quarter for three reasons: first, revenue, profitability and cash flow exceeded our expectations. Second, we made several sizable capital investments consistent with explicit elements of our strategy. Third, we made quick material progress on the cost challenges we identified last quarter. I'll briefly touch on all three. As a reminder, when M&I referenced our performance relative to expectations, we are comparing results to the outlook provided on our last quarterly call. With this in mind, each of our three business segments outperformed expectations for both net revenue and segment operating profits. Highlights included Turner & Townsend, an 18% net revenue increase, with revenue growth of 13% in U.S. leasing and 20% in mortgage origination fees. We believe that our advisory segment is on the cusp of an inflection point. On capital deployment, we made significant commitments in the quarter in support of our strategy. Combining CBRE project management with Turner & Townsend will create an exceptional operator in a vast space with significant secular tailwinds. Given its scale, this combined business will have a profound impact on the future of CBRE. I'll discuss the implications of this move in more detail following Emma's remarks. We continue to make investments that take advantage of the lack of capital available for well-positioned real estate opportunities by committing approximately $250 million in the second quarter to development projects we believe can be harvested at favorable times in the cycle. Our investment management, development, and brokerage businesses enable us to identify and execute these opportunities, and our balance sheet gives us the capacity to act on them. Finally, our acquisition of Direct Line Global enhances our capabilities in data center management, a rapidly growing market. Regarding progress on costs, actions taken in our GWS segment resulted in improved margin versus Q1. This, coupled with new business wins, has put us back on track to achieve full year margin expansion, along with mid-teens top-line growth and mid- to high-teens bottom-line growth in this segment. Taking all of this into account, along with our expectations of a strong second half, we have increased our outlook for full year core EPS to a range of $4.70 to $4.90, up from $4.25 to $4.65 previously. Now Emma will discuss our second quarter results and outlook in greater detail.

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

Thanks, Emma. I'll close with some thoughts about Turner & Townsend. While Turner & Townsend has some similarities to traditional commercial real estate project management businesses, its differences are significant and compelling. Beyond traditional corporate real estate project management, Turner & Townsend manages large complex programs in the infrastructure, natural resources, and green energy sectors. Examples of this include their work for the Sydney Australia rapid transit system, the New York Metropolitan Transit Authority, Toronto and Abu Dhabi's international airports, and the first new nuclear power station to be constructed in the United Kingdom in over 20 years. These programs typically span many years and include an array of individual projects. When Turner & Townsend project work for corporate clients, it typically involves larger, more complex, strategically important assignments. For instance, they are currently program or project managing 112 hyperscale data centers and the creation of multiple billion-dollar-plus advanced manufacturing plants around the world. Turner & Townsend is also the world's largest cost consultancy, a rapidly growing practice that secures the best pricing from the marketplace and optimizes cost performance across large complex capital programs. The combination of Turner & Townsend and CBRE project management will create significant revenue synergies between the two businesses' client bases and yield meaningful cost synergies through economies of scale and eliminating redundant functions. Turner & Townsend's leadership team will oversee the combined business. They have an exceptional track record in the areas of growth, strategic decision-making, and risk management. Since Vincent Clancy took over as CEO in 2008, Turner & Townsend's net revenue has grown from approximately $225 million to $1.5 billion in 2023, a compound annual growth rate of 13%. Since CBRE acquired our 60% ownership interest in November 2021, Turner & Townsend's net revenue has grown at a compounded rate of nearly 20%, attesting to the benefits of being part of CBRE's platform. Finally, I want to stress that the combined business, which is positioned to provide years of resilient double-digit growth, is large. It is expected to generate approximately $3.5 billion of net revenue and more than $0.5 billion of SOP in 2024. The business will be large enough, resilient enough, and rapidly growing enough to change the long-term profile of CBRE. Now operator, let's open the line for questions.

Congrats on a great quarter. Just starting with the GWS business. You talked about sort of the full year margin improvement being above last year, but all the cost sort of impact is going to take place in the second half, presumably second half is also going to be much higher than the first half. So how do we think about sort of annualizing the second half margin? Is that sort of a good run rate going forward for the business?

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

Got it. That's helpful. And then just my second one is just on the Advisory expectations and transaction activity. Maybe can you just talk about what you're seeing on the ground? What are you seeing in the pipeline? Obviously, maybe a better rate backdrop, but what sort of gives you confidence and conviction that you're seeing these green shoots given that we have had fits and starts in the past?

Ronald, thank you for covering us. We're excited to have Morgan Stanley following our progress. To respond to your question, I'll start with some observations from our recent leasing and mortgage originations in the second quarter, which have continued positively into early third quarter. I'll let Emma expand on that shortly. Additionally, we're gaining confidence from various factors. For example, our diverse operations as both an intermediary and a principal allow us to see unexpected demand in our development projects, which we anticipate will materialize in the fourth quarter. This trend suggests broader activity in the capital markets. There's market sentiment leaning towards potential rate cuts this year, and we've noticed that bid-ask spreads have become narrower, albeit with some exceptions in the office sector. Our investment sales and mortgage brokers are seeing increased activity and healthier pipelines compared to earlier periods. Feedback from office tenants, sourced through various surveys, indicates improved sentiment. So, we draw on this anecdotal evidence from the second and now into the third quarter. Additionally, we have technical evidence that suggests we may have reached a turning point in transactions, likely affecting leasing, sales, and mortgage brokerage activities positively, especially in the fourth quarter, benefiting our development business. Emma, would you like to add to this?

Yes. So Ronald, what we're seeing in leasing is that it continues to pick up globally. In the U.S., we are noticing the greatest strength in office leasing. While industrial leasing has seen a slight decline, office leasing is more than compensating for it. As we move into July, we are observing early signs of accelerating growth in leasing, which we believe would be a great outcome. We expect this trend to continue through the remainder of the year. On the sales side, we are noticing strong signs that the sales market is stabilizing. Globally, there are still declines, but one could argue that it is relatively flat. For us, sales activity reflected a decrease of only 2% in revenue during the quarter on a local currency basis, and we are beginning to see an uptick in activity in the U.S. sales market as we head into July.

Bob, you mentioned the differences between Turner & Townsend and traditional commercial real estate businesses. Would you consider spinning this off at some point? You talked a lot about those differences and changes in disclosure, so it seems you view this as somewhat distinct from the rest of what CBRE does.

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

Okay. And when the disclosure has changed, then have sort of the remaining facilities business and then the project management, how should we think about just organic growth for the facilities piece of it? Because it sounds like project management is going to be pretty high. Just where does that leave facilities?

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

Okay. Got it. And if I could just ask one more question just on the guidance. How much of the guidance should we think about as coming from just the outlook for selling more stuff than Trammell Crow and the development gains?

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

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

So on the commercial mortgage side, we saw a strong uptick in loan origination, and that was primarily for refinancing. So there is a big uptick in loan source from debt funds. Volumes from debt funds increased by over 70% in the quarter. And that was all refinancing. They're offering very short-term bridge loans to bridge providers until the banks and the agencies pick up. We actually saw a decline in originations from banks and the agencies as well. So we expect that to pick up in the second half of the year as rates come down.

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

We're experiencing a slight increase in acquisitions, but since it's starting from such a low level, it doesn't have a significant impact on our growth.

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

So on the office side, we think we've stabilized in terms of the size of transactions, and we're really seeing an uptick in volume, and we're seeing our uptick in terms of regionally we talked about it, you're seeing most of that increase in New York as occupiers are transacting across larger deals. We aren't seeing big movements in terms of square footage per transaction in terms of, obviously, rent per transaction; all of those metrics seem to have stabilized.

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

Jade, let me ask you to clarify that. When you say REI, are you talking about development or the investment management business?

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

The activity we're seeing is across three product types: data centers, industrial, and multifamily. The output we are expecting in the fourth quarter will lean more towards data centers than it ever has before. I don’t mean to repeat myself, but due to the numerous initiatives we’re undertaking within our platform, we are positioned strongly to achieve certain benefits that we might not otherwise attain. When you hear about Trammell Crow Company as a developer, it's often in terms of the types of buildings they construct or sell. However, what sets Trammell Crow Company apart is their expertise in land acquisition, entitlements, and developing or managing land sites profitably. Their development work over time in the industrial sector has allowed them to secure a substantial amount of land that can be repurposed for data centers. Typically, converting industrial land to data center land leads to significant profitability, which will be a major factor in our fourth quarter results. Looking further ahead, it's crucial to note that there has been a notable shortage of capital for new development opportunities in the market over the last couple of years. We experienced this slowdown ourselves, as third-party capital availability decreased. However, we’ve seen a significant return of that capital, and we have funded several development projects this year with third-party capital. Additionally, we have been more proactive in using our own balance sheet to acquire development land and in some cases, finance aspects of the development process beyond just land acquisition. We are monitoring this closely and are very confident about initiating projects, particularly multifamily projects, in markets where the influx of new projects has decreased significantly. This is reflected in our comments about the profitability emerging from that sector of our business.

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

The increase in the fourth quarter is primarily due to the data center asset sales. However, the key question is whether this increase is sustainable. We emphasized the embedded profits within our Trammell Crow in-process and pipeline portfolio, which currently holds about $750 million of profit based on conservative underwriting assumptions that we anticipate will be realized over the next four years. This profit will be more prominent in the later years as the projects take time to develop. There is a substantial amount of earnings within that portfolio, which we believe is sustainable. We think this aspect of our business is undervalued, especially regarding the profits expected to emerge from it. Looking at the data center sales anticipated this year, we view this as an indicator of an upcoming upturn in this business, suggesting an increase going forward.

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

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

Yes. So our strategies remain consistent in terms of capital deployment. We prioritize M&A and we're focused on looking at strategic, highly accretive acquisitions that drive a very strong return and will enhance our capabilities. We've been very focused on facilities management and project management. We expect both of those to tick up over the next few years. Our pipeline is very strong, though we always caution that it's very difficult to predict M&A, and we are extremely diligent in our underwriting. And so we focus on the deals that make the most sense and are going to drive the strongest return. In every single one of our deals, they have to exceed a hurdle rate that makes sense, and they have to exceed the return that we would get from share repurchases. So we look at where we're trading compared to your extrinsic value and make sure that those deals exceed that. If we don't have a tremendous amount of M&A in our pipeline or it's difficult to execute for whatever reason, and you've seen this in the past three years, we will buy back our shares. This year, we've done a lot of M&A so far, so I don't expect a tremendous amount of repurchases in the second half of the year, but that's simply a result of the amount of capital we've deployed this year.

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

We are significantly exceeding our cost of capital. Most of our deals, if not all, are underwritten with returns above the mid-teens. That's about all I can say on that.

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

Well, for sure, Class A office space is really attractive now because so many companies are focused on the experience of their employees, the productivity of their employees, the presence of their employees, etc. That's a well-documented dynamic. And it's easier to make that happen in better quality office space. But beyond New York, yes, in the tech markets, we're seeing considerable pickup. And we believe that it's driven by AI and all the activity around AI, the Bay Area, Austin, Texas, etc. We're seeing a pickup in those markets.

Most of my questions have been asked. But I guess one small just follow-up. I know the share buybacks was relatively light in the quarter, but I didn't necessarily see the actual shares bought back or an average price on the buybacks. I don't know if you have that.

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

Great. And then maybe, Bob, just on the cost containment, obviously, that seemed to maybe come through much faster than I think you expected and we expected. Maybe just speak to that a little bit. And I guess just how are you thinking about talent retention and talent acquisition at this part of the cycle? And how does that maybe affect or not affect kind of the margins going forward?

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

Yes, I will add. Our transformation office is focused on making long-term sustainable change in how we operate our business. And so we are not focused on episodic cost reduction; we want to be focused on delivering consistent operating leverage over time. So you can see that margin expansion. And that's not an easy thing to do. It's something that we're very focused on. All of our business leaders are very focused on, so from here on out, everything is focused on really driving that efficiency. And as we add resources as we invest in technology, as we invest in people, those are extremely smart decisions so that we know that down the road, we don't have to cut back.

Nice work here. First, now that you'll have Direct Line, are there other pieces you might need to pursue a comprehensive facility management solution around data centers and GWS? And just generally, how are you thinking about that opportunity and the differentiation of your capabilities now relative to peers and others playing in that market?

To answer that question, I want to back up and talk about how we think about mergers and acquisitions. I believe we need to improve how the market that invests in CBRE's shares understands our approach to M&A. Firstly, we do not have a group of businesses and leaders waiting for opportunities to purchase at a favorable price. Instead, we are a strategy-driven company. Each of our businesses has its own growth strategy, focusing on enhancing capabilities in areas that we believe will perform well over time, whether due to their resilience to market cycles or favorable trends. A clear example of this is Turner & Townsend. In our facilities management sector, we are undertaking initiatives that may not be expected because we have tasked the leaders in various sectors like manufacturing and financial technology with gaining insights into their operations and identifying differentiating capabilities to make our services attractive to clients in the long run. They are not actively seeking acquisitions in the marketplace. The transactions we've completed over the past year were not conducted through auctions. None of the deals related to Turner & Townsend, J&J, Direct Line, or a local FM business we acquired in Canada were made via auctions. We approached the sellers of those businesses directly because we believed they would be a good match for us. We generate ideas for our business and have a capable corporate development team led by a 14- to 15-year veteran from Morgan Stanley who brings these ideas to fruition through acquisitions and their integration. This is our M&A approach, and as a result, you should anticipate seeing us pursue more deals in the facilities management and other areas that might not be on the market's radar.

Got it. Yes, that's really helpful. And then just, I guess, as a follow-up in investment management, can you just talk about what you're seeing on the fundraising side right now? Is the environment there changed as you look back over the last few months?

Yes. We've noticed an increase in activity and we anticipate further growth in enhanced return strategies. Additionally, the first half of the year showed improvement in core and core plus strategies. This trend seems to be occurring across the market, which we view as a very positive sign for the rest of the year.

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

Yes. Peter, you just said something that's really important: pent-up demand. When we talk about investment sales activity coming back, the trading of assets is coming back. It's not going to be a circumstance whether the marketplace is going to become more attractive because rates have stabilized, bid-ask spreads have come down. And therefore, a bunch of people that wouldn't have otherwise been in the market are going to say, 'Oh, it's a better environment. Maybe I should sell something.' There has been a massive base of assets held by people that wanted to sell them for the last couple of years. There has been a massive amount of capital on the sidelines that wanted to get in and do real estate deals for the last couple of years. The buyers and sellers have been there. We don't have to find them. They're there. What has to happen is the environment needs to get to a place where you're going to see people jump in and act. And what's happened is the certainty around interest rates coming down has grown, the bid-ask spread has narrowed. There's less volatility in the market. And that's why in a business like our Trammell Crow Company development business, where we're a principal, not an intermediary, we're seeing action very real action that's going to take place in the fourth quarter. We've been there with those assets. Now we're going to trade those assets because the environment is going to be right.

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

Peter, Emma is a good one to answer that question because in addition to all the other things she does, she actually handles our real estate portfolio, and she's in the market now. And so she can tell you as a consumer what that feels like.

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

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