Cushman & Wakefield plc (NYSE:CWK) Q3 2022 Earnings Conference Call November 3, 2022 5:00 PM ET
Company Participants
Mike Spooner – Head of Investor Relations
John Forrester – Chief Executive Officer
Neil Johnston – Chief Financial Officer
Conference Call Participants
Chandni Luthra – Goldman Sachs
Anthony Paolone – JPMorgan
Michael Griffin – Citi
Pat McIlwee – William Blair
Patrick O’Shaughnessy – Raymond James
Ronald Kamdem – Morgan Stanley
Operator
Welcome to Cushman & Wakefield’s Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
It is now my pleasure to introduce Mike Spooner, Head of Investor Relations for Cushman & Wakefield. Mr. Spooner, you may begin the conference.
Mike Spooner
Thank you, and welcome again to Cushman & Wakefield’s third quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results for the period. This release, along with today’s presentation, can be found on our Investor Relations website at ir.cushmanwakefield.com.
Please turn to the page labeled cautionary note on forward-looking statements. Today’s presentation contains forward-looking statements based on our current forecasts and estimates of future events. These statements should be considered estimates only, and actual results may differ materially.
During today’s call, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Reconciliations of GAAP to non-GAAP financial measures, definitions of non-GAAP financial measures and other related information are found within the financial tables of our earnings release and appendix of today’s presentation.
Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2021 in the local currency unless otherwise stated. For those of you following along with our presentation, we will begin on Page 4.
And with that, I’d like to turn the call over to our CEO, John Forrester.
John Forrester
Thanks, Mike, and thank you to everybody joining our call today. We’ve reported continued top line growth across all three segments, resulting in fee revenue of $1.8 billion, up 8% versus 2021.
On a year-to-date basis, fee revenue was up 18%, while adjusted EBITDA is up 29% versus prior year. While the majority of our service lines have performed well this year, we are now feeling the impact of trading challenges and headwinds in specific areas, namely in subdued activity in our substantial Greater China platform due to the extended and continuing COVID-related lockdowns, the stronger U.S. dollar generating significant foreign currency drag versus prior year, and our capital markets service line globally, which is experiencing lower volumes compared with the same quarter of 2021.
Looking ahead at the general environment over the coming quarters, it is reasonable to assume the recessionary conditions will continue to permeate the real estate sector, particularly in transactional business. Notwithstanding this, our revenue performance in the quarter illustrates the result of the multi-year strategy we have deployed with discipline to build a fully diversified and a more highly recurring revenue-related business.
This strong platform, along with our continued progress in capital allocation strategy to prioritize investments in the long-term growth sectors of our industry continues to position us nicely and will allow us to more successfully navigate through the current macroeconomic environment. Fluid environments create opportunities for the largest global players to grow market share in the inevitable flight to quality.
Now let me highlight a few trends that are working through our sectors and are apparent in the quarter. In the office leasing sector, the return to office continues to trend higher as the pandemic fades. Now at a post-pandemic high of nearly 50% occupancy in the U.S., where businesses are largely back to signing longer-term leases again, nearly matching pre-pandemic norms.
There are a small but notable number of major cities, which are lagging due to their unique set of challenges. But these trends and others cement our view that office while evolving remains highly relevant. It is also clear that there’s a growing disconnect between supply and demand, newly built high-quality office space that offers exceptional amenity and sustainability fundamentals, now accounts for a significant portion of the positive absorption.
However, this is in relatively limited supply, with approximately 70% of the world’s office inventory now more than 20 years old and unrenovated. We see that disconnect between what most occupiers now demand relative to what the market is generally offering as a considerable opportunity in our sector.
In Life Sciences, our revenues year-to-date have grown 90% versus prior year, illustrating the opportunity that secular trends drive for companies like us who are able to offer highly skilled advice in emerging sectors.
Turning to the industrial leasing sector, record performance over recent years has continued in the third quarter. Globally, we expect e-commerce penetration will be a strong tailwind for many years to come as countries continue to climb up the online curve. And in multi-family, population growth and household formation will continue to grow globally, creating more demand for homes.
The recent rise in mortgage rates will make renting the more affordable option. Multi-family is now the largest asset class in terms of sales volume, accounting for more than 40% of total volume in 2022 according to Real Capital Analytics.
And lastly, the share of the world’s population aged six years over is expected to continue to grow, doubling in size by 2050, which we believe presents a strong tailwind for numerous sectors, such as life sciences, medical office and self storage. Our investments during the past few years in these and other secular areas are reflected in the strong growth we’ve experienced and demonstrates our agility to pivot as markets evolve.
Now turning to our property facilities and project management service line performance. Our recurring revenues remain resilient and continue to generate growth, increasing 14% in the third quarter versus prior year. Consistent with previous quarters, our project management and global occupier outsourcing businesses continued their exceptional momentum, up 40% and 8% in the third quarter versus prior year, respectively.
Clients, driven by this secular expansion, continue to turn the Cushman & Wakefield to partner on their largest challenges, whether that be occupancy requirements, sustainability objectives or reducing costs within their organization. The impact of the headwinds in the weakening macro environment are most keenly illustrated in our capital market service line. Challenging prior year comparisons, along with a markedly different environment are reflected in our results for the third quarter.
As such, we do not expect 2022 Capital Markets revenue to outperform the record set last year, particularly over the second half. While the market may perhaps take some time to recalibrate as the higher interest rate and inflationary environment takes its toll. We remain well-positioned to navigate through this environment given our global position and industry-leading teams and our people are in an exceptional position to advise our clients on the many opportunities that will be created through this environment and subsequent recovery.
The longer-term fundamentals that support our business and our industry remain robust. As a globally diversified industry leader with a strong balance sheet and ample liquidity, we have doubled down on our already high focus on cost management and careful investment discipline. We are continuously seeking the highest return for our capital allocation in order to maximize value for our shareholders.
We remain confident about the performance of the business and our progress against our multiyear strategy. Our exceptional leaders and dedicated teams in the field continue to deliver exceptional service every day to our clients. We know from experience that challenging conditions can also bring opportunity. We were recognized by the global business community for our insight and leadership to the global pandemic, and we intend to stand confident with our clients as we help them navigate and realize these opportunities.
With that, I’d like to turn the call over to Neil to discuss in more detail our financial performance. Neil?
Neil Johnston
Thank you, John, and good afternoon, everyone. For the third quarter, fee revenue of $1.8 billion grew 8% on the prior year. Fee revenue growth reflects strong leasing and PMF and performance, offset by lower capital markets activity in the third quarter versus prior year. Adjusted EBITDA for the third quarter of $202 million declined 5% versus prior year.
The decline in adjusted EBITDA was principally driven by higher commission expense, foreign currency headwinds and COVID-related lockdowns in China. The higher commission expense was the result of brokers in the U.S., achieving higher payout tiers earlier than prior year due to the strong growth in brokerage in the first half of the year.
Offsetting these headwinds were the earnings recognized from our Greystone joint venture, which performed in line with expectations for the quarter. Adjusted earnings per share for the quarter was $0.43, a decrease of 10% versus prior year.
Taking a look at our fee revenue by service lines. In the third quarter, leasing revenue increased 16% versus prior year. Leasing fee revenue exceeded pre-pandemic levels, increasing 12% over the third quarter of 2019. Both the Americas office sector and the industrial logistics sector continued to perform well during the quarter.
Capital Markets fee revenue declined 18% in the third quarter with all segments declining versus a challenging prior year comparison. As a reminder, Q3 2021 capital markets revenues grew 111% versus the comparable prior year in a markedly different macroeconomic and interest rate environment.
Third quarter capital markets revenues were still above third quarter 2019 levels by 12%. And – in our non-broker service lines, performance across our entire PM/FM service offering was again strong this quarter, particularly in our project and facilities management businesses, with PM/FM and valuation and other service lines up 14% on 5%, respectively.
Turning to our segment results for the quarter. Americas fee revenue was up 7% year-over-year, driven by strong performance in leasing and PM/FM. Leasing revenue improved 20% year-over-year and was above 2019 pre-pandemic levels. Capital Markets fee revenues declined 17% in the quarter versus a challenging prior year comparison.
Adjusted EBITDA of $166 million increased $5 million versus prior year. The adjusted EBITDA performance is principally driven by our Greystone joint venture, offset by higher commission expense in brokerage in results of more brokers achieving higher payout tiers earlier than in prior years.
In EMEA, fee revenue growth of 6% was driven by growth across PM/FM, leasing and valuation and other. Leasing grew 6% with performance across nearly all markets and sectors. Capital Markets declined 14% versus a challenging prior year comparison. Adjusted EBITDA of $25 million declined formally versus prior year, primarily driven by unfavorable currency headwinds as a result of a stronger U.S. dollar.
On a local currency basis, adjusted EBITDA grew 7% for the quarter. In Asia-Pacific, fee revenue growth of 12% was driven by the performance of our PM/FM service line, which grew 27% for the quarter. Partially offsetting this growth was a decline in our capital markets business of 42% versus prior year, which was principally driven by the impact of COVID-related lockdowns in China.
Adjusted EBITDA of $12 million was down 57% versus prior year, driven by declines in China and earnings from our Vanke joint venture as well as the impact of government subsidies in other APAC countries reflected in our prior year results.
Moving to our balance sheet. Our financial position remains strong. We ended the third quarter with $1.5 billion of liquidity, consisting of cash on hand of $381 million and availability on our revolving credit facility of $1.1 billion. We had no outstanding borrowings on our revolver. Net leverage was 2.8 times at the end of the third quarter, slightly up from the second quarter.
We have an active pipeline of opportunities, but we will be disciplined and selective as we consider how we deploy capital going forward. While the business has performed well in 2022, certain areas have now impacted our profitability, including weakening capital markets conditions, continued COVID-related lockdowns in China and foreign currency headwinds.
As a result, we have already implemented targeted cost actions to reduce our in-year spend. Further cost actions are being evaluated as part of our annual budgeting process, and we will provide an update at our year-end earnings call.
As we finish up the year, we expect revenue in the fourth quarter to decline as a result of the slowdown in transactional activity due to economic uncertainty. We anticipate brokerage being down materially with leasing somewhat more resilience in capital markets in the fourth quarter. We expect our PM/FM business in the quarter to be flat, primarily due to the timing of new contracts in balanced against exiting contracts, which is in line with our initial operating assumptions from the start of the year.
As we’ve consistently said, we are pleased with the performance of our PM/FM business, which provides recurring revenues, especially during periods of uncertainty. Our PM/FM business has grown well this year, and we anticipate full year growth in the upper-single digit range driven by continued market share capture and strong activity from our project management business.
Given the headwinds we are now facing, we now anticipate adjusted EBITDA margins for the full year 2022 to be down versus prior year but still well above 2019 levels as a result of our cost programs over the past several years. We are still in the process of developing our operating plan for 2023.
As John mentioned, while a number of scenarios could still play out in 2023, it is reasonable to assume that recessionary conditions will be evident, particularly in transactional businesses with the length and depth of that scenarios done certainly. In terms of top line trends, we anticipate our PM/FM revenues to be more stable and resilient given the recurring nature of the business.
In brokerage, we anticipate tougher comparisons, particularly in the first half of the year given the macroeconomic environment. As a result, revenue mix will likely impact adjusted EBITDA margin. As mentioned earlier, we will continue to be focused on targeted cost controls while ensuring that we continue to selectively invest in growth areas to set us up for a strong recovery. We’ll provide full year 2023 guidance on our next earnings call.
With that, I’ll turn the call back to the operator for a Q&A portion of today’s call.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Chandni Luthra with Goldman Sachs. Please go ahead with your question.
Chandni Luthra
Hi, good afternoon. Thank you for taking my question. So you guys basically mentioned that you are focused on cost management. Could you please elaborate what are the levers that you’ll have to pull at your disposal? And then I think you said that you’ve already implemented targeted cost cuts in EMEA or maybe that was APAC, I’m sorry. Could you perhaps elaborate more in terms of what these are exactly? Thank you.
John Forrester
Hi, Chandni, thanks for the question. This is John. I think there was a blip in the line there. We’ve already actioned targeted cost actions across the whole business, not specific to any region. We began this work just at the turn of the end of half one when we felt that the market was likely to be moving against us.
So the way I’d answer your question is that we, over the last three years, in particular, have been extremely highly focused on our cost management and also using that as a tool to expand our margin. $250 million of structural cost been taken out of Cushman & Wakefield during that period. And actually, the back end of that, some $30 million is also – is showing up in 2022.
Now on top of that, we are already taking action to strip out costs in line with the volume changes that we’re seeing in our transactional business as well as being extremely cautious on our deployment of cash in discretionary areas. So I think that we’ve done extremely well as a cost management team over the recent period.
That muscle memory is deep in the company. We’ve applied it already to this financial year, and that will have a material impact on our year-end close. And as Neil said in his call, as we build the plan for next year, we’ll give more guidance on the actual cost structure. But there’s nothing I’m seeing in the type of cost plans being put out by our peers that isn’t already fully formed within Cushman & Wakefield at this point. Neil, do you want to add anything to that?
Neil Johnston
I think you said it well, John. Yes.
Chandni Luthra
Now I totally understand that. Look, I think it’s also an incrementally worse macro environment, right? So I was just hoping to get kind of more incremental color around that, but thank you. Help us understand how you’d get comfortable around your leverage? And how should we think about capital allocation going into 2023, just given where the trajectory of interest rates is going and given where your leverage at?
Neil Johnston
Sure, Chandni. As we look at our overall liquidity, we feel like we’re in a very strong position as we move into 2023. Leverage for the quarter moved up very slightly, but we still feel very comfortable in the range in which it’s in. We are clearly very focused on cash flow as we move into 2023, but we feel like we’re well-positioned as we go into next year.
Chandni Luthra
Got it. Thank you.
John Forrester
In terms of the – Chandni, just adding a little – it’s John here. In terms of actual use of capital, we’ll be extremely careful and likely to be relatively muted us in the first half.
Chandni Luthra
Understood. Thank you so much.
Neil Johnston
Thanks, Chandni
Operator
Our next question comes from the line of Anthony Paolone with Morgan Stanley – JPMorgan. Please proceed with your question.
Anthony Paolone
Okay. Thank you and hi, I guess first question, just a clarifying one. I think you mentioned PM/FM, I think, in the fourth quarter, flat. Was that sequentially or year-over-year?
Neil Johnston
Tony, that’s year-over-year. And the reason why it’s a little lower than it is year-to-date is really two things. First of all, as contemplated in our plan, there are so contracts that roll on and roll off. So we expect the growth to be a little more muted than we’ve seen throughout the year in the fourth quarter. And then also, a lot of our PM/FM business is in Asia-Pacific. And so there will be some FX headwinds there. So overall, we feel very good about the business. We expect to see that up nicely this year and expect strength going into next year.
Anthony Paolone
Okay. Has there been any appreciable change to just the pipeline and RFPs and things of that nature?
John Forrester
Tony, this is John. No, the nice momentum we’ve seen in our general PM/FM businesses across the world in the last two years to three years continues at the same sort of rate. We have a really good win rate. We have a really good retention rate. That’s actually showing up in the numbers in this quarter and year-to-date.
And as Neil said, we continue to think that will move on. Traditionally, in recessionary times, it’s the recurring revenue businesses that can actually do pretty well as corporates try to reduce their own cost base, applied to real estate, so through outsourcing. And we totally expect that to continue with the volatility that’s surrounding the macro economy at this point.
Anthony Paolone
Okay. And on China, can you maybe put some framework around just how big a business that is for you all because I mean, I understand the drag, but if it come up a bit more in your commentary than maybe some of your peers.
John Forrester
Happy to. Again, it’s John here, Tony. We’ve long been a leader in real estate services in China. And the way our business is structured at this point, you might remember, we did a joint venture with Vanke Services. I think over two years ago now, where we placed our recurring revenue business with that market leader.
So the structure of that means that we only a flow-through of EBITDA. So when that is down a little, it just hits us straight on the EBITDA line. And of course, largely the transactional business within Greater China is extremely muted to the full year – likely through the full year now as we see very little activity.
Now ultimately, what is a headwind to us this year becomes a tailwind once released. So we are optimistic about the overall real estate fundamentals there. But in terms of revenue, it isn’t material because ultimately, we have this extremely large recurring revenue business in APAC and Asia-Pacific, which drives the business, particularly in terms of volatility to continued pleasing growth.
Anthony Paolone
Okay. Got it. And then my last one is on the cost side. And if I look at just your third quarter OpEx was $315 million, thereabouts, was up, I think, 4% year-over-year. Is that kind of the area that you would target to try to protect margins? I think, John, you had mentioned trying to reduce cost commensurate with the volume declines. So just trying to understand how hard or not that may be just if it’s got to come out of that line because the other costs are pretty much already variable or maybe I’m looking at it wrong.
Neil Johnston
Tony, I think you’ve got it right. About 45% of our costs, as you know, are variable. So those will move and those will just move with revenue. About 40% of the costs are semi-variable. That’s where we are – we have already initiated cost control. Those are discretionary spend, things like T&E, things like marketing, that sort of thing.
And so you will see some savings there already actioned. And then about 15% of our costs are more fixed, and that’s where those costs take longer. That’s where – those are the costs that we’ll address as we go into next year. But as you think about costs, it really is this variable costs that will come down very quickly with the drop in revenue.
Anthony Paolone
Okay. And those percentages you just gave, that’s across total, both cost of services as well as OpEx, not just that OpEx line…
Neil Johnston
That is absolutely right.
John Forrester
You are.
Anthony Paolone
Okay.
John Forrester
You’re right.
Anthony Paolone
Okay. Thank you.
Operator
Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.
Michael Griffin
Great. Thanks. Maybe we can go back to John’s comments on the office leasing demand. It seems from your outlook, like it’s still pretty solid. Do you have a sense from your occupier clients, are they taking more space or less space? And do you notice if they’re looking for anything different when they’re making these decisions?
John Forrester
Michael, thanks. I’m happy to elaborate on it because some of the things we’ve been talking about for a while now truly showed up in Q3. It was a really solid month for us – sorry, quarter for us in leasing. But that really highlighted the fact that as an organization, we tend to focus on higher-quality assets globally.
So the flight to both quality in terms of Class A and then within Class A highly sustainable real estate meant that that was a highly traded asset class in leasing in the quarter, far more muted, I believe, through the good levels Billion and C. So there, flat to quality. And then within that, the lease terms being signed by occupiers are back to pre-pandemic norms.
So therefore, there’s a commitment from the occupational market to see office as important as it was before the pandemic. Now in terms of the amount of space, we are in this evolving environment of more hybrid user space. And ultimately, at this point, we are seeing some occupiers in some sectors looking at slightly lesser takes.
But I’d remind everybody on the call that ultimately, our revenue relies on deal volume and the dynamic of change in the market, not specifically the amount of space in total utilized. And one final point, which is – the vast majority of cities around the world are back to very similar pre-pandemic norms both in desk utilization and the type of net absorption that we’re seeing.
But there are some very notable major global cities, which just happen to be very visible in terms of – that tends to be where many headquarters are located, it’s London, New York, San Francisco, where long commute times and other challenges have meant that actually, there’s a more dynamic office leasing market going on at this point.
But I think, finally, what I would say is that we’re seeing some considerable construction cost increases coming through the market at this point, which makes the viability of new development quite difficult, which will see a focus on the refit of the B and C portfolios sitting in the market. So actually, they will come through as highly sustainable once capital is being allocated to those assets, which will release up a more aligned supply to demand because at this point, there actually isn’t enough high-quality Grade A highly sustainable assets globally to satisfy corporate demand.
Michael Griffin
Got you. I really appreciate the color there. And then maybe just one other one on cross-selling across business lines. I know you’ve talked about this being a focus in the past. And just with the capital market side of the business, seemingly pretty muted for the near-term. Does that make cross-selling opportunities harder? And how would you plan to address that?
John Forrester
The services provided by organizations like Cushman & Wakefield play to the full suite of needs of our clients. So I think you’re focused on the investor owner there. When there’s a lack of activity in terms of trading and sales in capital markets, ones tend to double down on the quality of the income streams they have from their occupiers so they get very focused on the retention of those tenants, the provision of high-quality services to them, but to focus on the provision of really high-quality property management skills, particularly in the return to office that we’re seeing at this point, but across all asset classes.
So yes, there is a sort of a doubling down on the ability for us to sell our broader set of services to occupiers – sorry, to owners who are likely to be holding their assets at it longer at this point. I’d also just highlight, of course, that whilst there may be a muted level of actual capital markets deals in terms of sales going through at this point, the need to refinance continues at the lid of recent years.
So that’s where we can also provide our capabilities. It’s not just in the equity sales side of the business, but it’s also in the debt refinance opportunity. And that will continue through this next period.
Michael Griffin
All right. That’s it for me. Thanks for the time.
Operator
Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.
Pat McIlwee
Hi, thanks. You’ve got Pat McIlwee on for Stephen’s team today. So I think generally, we expect just short of 10% of office leases to come due each year, somewhere in that ballpark. But given that, that can has been kicked down the road a bit with some of these shorter-term leases, do you think you’ve been seeing some of that pent-up demand or those pent-up leases flow through? Or is that still largely to be seen?
Neil Johnston
No. I think we’re in a relatively normalized period part of lease renewals or relocations by the occupiers. Yes, there was that period in the pandemic where they kicked one or two years. And I think with the volatility that we’re seeing in the market now and a general approach towards caution by most corporate occupiers globally.
There may be more cans being kicked actually over the next couple of years, particularly as organizations settle on what they think the future of the office truly is. But that’s sort of in the system of our revenues now. And whilst we don’t expect leasing to be immune from falls in global GDP because there’s a high correlation in particular, to GDP and job growth. We do think that this element of short-term renewals and also pre-pandemic long lease and norms that we’re seeing will continue.
Pat McIlwee
Understood. Okay. And then switching gears, with great zone, you’ve now got a bit more exposure to the multi-family and DCM side of things, which you just touched on briefly. But in the prepared remarks, you had said that performed relatively in line with expectations. I just want to ask if you can talk a bit more about how that business performed in the quarter and maybe specifically towards quarter end, what you saw there.
Neil Johnston
So yes, the prepared remarks, we’re very clear about it performing as we’d expected in the quarter. We’re now three quarters into our ownership relationship with Greystone. Our teams are really beginning to gel and go-to-market together. We have found that has been a very positive sales proposition for us, and we’re beginning to grow market share in that equity debt market totally in U.S. multi-family. So we’re very pleased with the acquisition with the teaming that we’re doing with the Greystone team. And ultimately, as part of our plan to be the primary multi-family full-service provider in the market in the U.S. at this point, but globally in the future.
Pat McIlwee
Okay. That’s great. That’s all for me. Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Patrick O’Shaughnessy with Raymond James. Please proceed with your question.
Patrick O’Shaughnessy
Heyy good evening. So year-to-date, your operating cash flow was negative $195 million. Obviously, there’s some seasonality in cash taxes that you had to pay for last year’s earnings. But how are you thinking about cash flow over the remainder of this year and then probably more importantly for 2023?
Neil Johnston
Yes. Sure, Patrick. You’re right. In the third quarter, we actually had positive cash flow, $38 million cash. Our cash flow, as you know, is always seasonal. We see an outflow in the first half of the year. And then we see the inflow in the back half of the year. This year was a unique year in that we had three things, which impacted cash flow.
The first, as we said throughout the year was the significantly higher bonus and commissions that we paid out tied to 2021 performance. So those – the big performance, especially in December, got paid out this year. So that was a drag on cash flow this year. We also had some NOLs roll off cash taxes slightly higher.
And then with the increase of our PM/FM business, there was an abnormal timing mismatch of some reimbursable payments and receivables, so that had a negative working impact. So the majority of the difference really is timing related this year. As we look to next year over the cycle, our cash conversion rate remains in that 30% to 40% range. Cash flow this year will be lower. Cash flow last year was significantly higher. And then as we go into next year, once again, we remain very focused on cash flow and cash flow conversion.
Patrick O’Shaughnessy
All right. That’s helpful. And then APAC, is there a path back to double-digit adjusted EBITDA margins given the cost actions that you’re taking?
John Forrester
I think the – Patrick, I think the most likely path back will be a pickup in transactional business across APAC and the reopening in particular, of Greater China. As I say, we have a very large-scale PM/FM business out there. So driving up to double digits doesn’t come necessarily from within that service line alone.
We do need the mix issue to come back with transactions. Given so much of our business out there is actually PM/FM, therefore, largely labor applied to client sites. There isn’t a huge amount of OpEx this question earlier. There’s a huge amount of OpEx applied to that business. But we’re being very cautious on where we find cost opportunities across the whole business and APAC is not immune to that.
Patrick O’Shaughnessy
All right, understood. Thank you.
Operator
Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.
Ronald Kamdem
Hey, just a couple of quick ones back to the cash flow question. I think you talked about sort of the seasonality year-to-year or I guess some of the differences year-to-year. I mean when you take a step back, what’s the sense of – what’s the annual run rate of the operating cash flow we should be thinking about historically on the business and so forth, right? Granted that 2021 and 2020 are sort of odd years. But sort of in your minds, what’s that number usually trends to?
Neil Johnston
Yes. So I think if you take the average of the two years, you’re getting pretty close to a 25% to 30% cash conversion rate based on adjusted EBITDA. And that is the target that I would use over the long run. I think it’s – as I said, a lot of this year’s cash flow was timing. You saw the very significant, I think last year was higher than expected, as we’ve said. So that’s probably a good guide as you look forward to the business.
Ronald Kamdem
Okay. Great. And then just going back to some of the comments on 4Q, I’ve got the PM/FM at flat. Maybe can you remind us again what you were thinking for leasing and sort of any color commentary there in terms of that year-over-year growth. I think I missed that.
Neil Johnston
Yes, sure. At this point, given the significant uncertainty we’re seeing as we move into the fourth quarter and the fact that December is such a big month. We are not providing specific guidance around brokerage. What we are saying is that we expect it to be down significantly. And then we’ve also given guidance around the margin we expect given the fact that we are going to be extremely cost conscious and cost-focused and protecting that margin. So you will see the brokerage, which obviously has a higher flow through. We’ll do our best to protect margin against that, but it’s very difficult to fight that mix. And so that’s what’s impacting the margin.
Ronald Kamdem
Great. And then just my last question is, I think the commentary on office was really helpful. Maybe as you think about some of the other sort of verticals, industrial, departments, even hotels or whatever. Maybe I’d love some commentary on views there, how those are performing, opportunities there as well. Thanks.
John Forrester
So I’ll deal with the very large asset classes. I think if you talk about logistics, as I said in the commentary or the tape piece that the quarter was still very strong in logistics and industrial leasing generally, with only 1% vacancy rates in the U.S. So we do think that, that is likely to continue, certainly through the long-term.
Retail is showing a very robust response towards a long-term change in the amount of physical retail required by the world, and we continue to see pleasing growth in retail leasing service line, although it is from a significantly lower base than historically. But I think the real story is in the evolving nature of the newer asset classes.
I touched on the growth we’ve seen so far this year in Life Sciences. I could point to similar pleasing growth that comes through from the work that we do in data centers and other secular growth areas. So in a way – in the same way for offices, it’s wrong to make a generalization because you need to look at the quality of the office, the sustainability level of the office, potentially the location of the office, most asset classes need to be discussed in a more granular level.
But on the whole, as I said, leasing in that quarter three showed up very nicely for us, reflecting the strength of the brand and our position in global markets, but we do not expect it to be immune from the impacts on GDP and they’re flowing through the macro economy at this point.
Ronald Kamdem
Great. Thanks so much.
Operator
There are no further questions at this time. I will now turn the call over to John Forrester for closing remarks.
John Forrester
Just to say thank you for everybody for joining us here today, and of course, for all of those clients and our team members listening. Thank you for your ongoing support at Cushman & Wakefield, and we look forward to continue our relationships with all of our clients, and of course, all of our great time. Thank you.
Operator
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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