CBRE Group, Inc. (CBRE) on Q1 2023 Results - Earnings Call Transcript
Operator: Greetings, and welcome to CBRE's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Burke, Senior Vice President of Investor Relations and Strategic Finance. Thank you, Brad. You may begin. Brad Burke : Good morning, everyone, and welcome to CBRE's first quarter 2023 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use all along with our prepared remarks and an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that today's presentation contains forward-looking statements, including, without limitation, statements concerning our earnings outlook. Forward-looking statements are predictions, projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our SEC filings. We have provided 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'm joined on today's call by Bob Sulentic, our President and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 5 as I turn the call over to Bob. Bob Sulentic : Thank you, Brad, and good morning, everyone. Our first quarter results were slightly better than we expected going into the year, but still down significantly from last year's strong first quarter. Our performance relative to our expectations was led by the cyclically resilient elements of our business and our cost management efforts, which more than offset a greater-than-expected decline in property sales. The elements of our business that are cyclically resilient include our entire GWS business, loan servicing, property management, valuations and asset management fees from our investment management business. Combined, these businesses saw revenue increase nearly 10% during the first quarter and are expected to account for more than 50% of our business segment operating profit for the year, a record high. With this increased diversification, our business is more resilient, but current conditions are difficult for capital markets and getting more difficult for leasing. There are three major reasons for these difficulties. First, inflation, elevated interest rates and the likelihood of a recession. Second, banking system stress and third, issue specific to the return to office and office utilization. I'll address each of these. We are aligned with the consensus view that the economy will tip into a recession later this year. We believe it will be a moderate recession and that an eventual easing of the Fed's monetary policy will spur a rebound in economic activity in 2024. The comments Emma and I make today and our responses to questions will be shaped by that view. The high-profile regional bank failures last month have further constrained lending. However, we are not in another global financial crisis when all debt capital source is contracted simultaneously. Regional banks are still lending to commercial real estate but on a much more selective basis. We expect the regional bank pullback to be partly offset by other capital sources, including the GSEs, debt funds and private capital sources. Looking at the office market, we estimate it will take this asset class twice as long to recover the lost value as it did in the aftermath of the global financial crisis. This reflects the formidable challenges facing office assets, driven by both the slow progress employees return to office and the shedding of jobs in tech and other sectors. Ultimately, we believe that office portfolios will shrink meaningfully from where they were prior to the pandemic, making offices a smaller but still very large commercial real estate asset class. Even with these legitimate concerns in line, we believe sentiment has deteriorated more than the fundamentals that underpin our business. This pattern is typical with commercial real estate investors and occupiers, becoming overly bearish in anticipation of and during early stages of a down cycle. It is our view that debt cost and cap rates are likely near their peak and should gradually improve starting later this year, driving a turnaround that will significantly impact 2024 performance. To expand on my earlier remarks regarding the growing resilience in our business, our Global Workplace Solutions segment, which generated more than $900 million of segment operating profit over the past 12 months, is expected to grow by double digits this year. In total, our cyclically resilient business lines, including GWS, produced approximately $1.5 billion of segment operating profit over the past 12 months and we expect them to grow in aggregate by high single digits this year. It's also important to note that we have become much less dependent on office properties, which accounted for just 14% of U.S. property sales revenue in 2022. Other asset classes where we have large businesses will be more resilient. For instance, we expect valuations for industrial and multifamily to fully recover in two to three years, less than half the time it took coming out of the global financial crisis. Although we anticipate pressure on our transactional businesses to intensify further this year, we are maintaining our earnings outlook for full year 2023. Emma will discuss this in detail during her remarks. Emma? Emma Giamartino : Thank you, Bob. As Bob mentioned, the diversification of our business and rigorous financial discipline were key to producing Q1 results that were slightly better than the expectations we set forth for each of our segments in late February, despite some market environment becoming more challenging. I'll review each segment now, starting with Advisory Services on Slide 6. Results in the first quarter were supported by stability in our valuations, loan servicing and property management lines of business, with revenue relatively flat compared to prior year. We also benefited from cost mitigation efforts, we initiated last year that decreased advisory operating expenses by 2.5%. So these benefits were offset by a greater decline in our property sales business than expected. Capital markets, property sales and loan origination combined declined 40%, a slightly greater decline than expectations. Within property sales, all major reasons saw revenue decline with Asia-Pacific performing the best, down 30%, and the Americas falling more than 40%. Most sales activity today involves industrial and multifamily properties with office understandably drawing little capital activity. Significant capital is ready to be deployed, but we do not expect activity to improve until borrowing costs decline and market pricing clarity improved. Leasing revenue declined 8%, in line with expectations against the nearly 50% increase in the first quarter last year. Across geographies, leasing performance diverged, with the Americas down 10% and EMEA down 5% and APAC up 26%, all in local currency. This is consistent with our expectations for non-U.S. markets, especially APAC, to perform relatively better in light of regional economic outlooks and improved office utilization levels. Now please turn to Slide 7. Our GWS business continues to grow impressively with both facilities management and project management net revenue up by double digits, exceeding our expectations. Growth was driven by several of the large facilities management contract wins achieved last year and strong organic growth within project management, driven by large project mandates. Our pipeline of new business reached a record level at the end of the first quarter as both existing clients and first-generation outsourcers are increasingly focused on cost reduction. GWS's margin on net revenue of 10.8% was in line with our expectations and will improve throughout the year as our cost reduction efforts to phase in. Please turn to Slide 8. Overall, REI results met our expectations, and we continue to expect full year results to meet our original guidance. Q1 development results were supported by large asset sales, which occurred in January, consistent with what we discussed last quarter. For the balance of the year, we expect our asset sales to be heavily weighted to industrial projects such as monetized in the fourth quarter. We have pulled back only slightly on planned construction starts for 2023. We do anticipate that well-conceived projects we got in the current environment will come online in supply-constrained markets, most notably for industrial. For the same reason, we are focused on carefully building our land position so that we can benefit from a first-mover advantage coming out of the downturn, a position that has historically provided significant rewards. Additionally, our Telford UK development business is tracking in line with our expectations, and we continue to expect improvement from 2022 results. Within Investment Management, profit was roughly flat versus prior year, excluding the mark-to-market impact on our co-investment portfolio, which was a significant positive in the prior year. For context, co-investment gains made up less than 1% of this business line's operating profit in the trailing 12 months. AUM declined modestly from the fourth quarter as net capital inflows and foreign currency effects offset most of the loss of market value. Turning to Slide 9. We believe the current environment is an attractive time to deploy capital. Our M&A pipeline is strong with multiple attractive opportunities, some large that could transform CBRE's existing offerings and drive meaningful shareholder value. We reduced share repurchases in the quarter as we continue to evaluate these opportunities. If we are unable to convert our larger pursuits we will accelerate our share repurchase activity well above Q1 levels. In any event, we expect to deploy more capital in the next 12 months than in the prior 12 months while maintaining an appropriately conservative level of leverage. We expect to generate in excess of $1 billion of free cash flow this year. When combining this expected free cash flow with our lightly levered balance sheet, we could invest as much as $5.5 billion this year, while maintaining leverage below 2 turns. I'll conclude with our outlook. Our original 2023 outlook contemplated our recovery from the current downturn in the back half of the year. We now expect a delayed recovery due to more constrained debt liquidity and heightened market uncertainties. Our sales and leasing businesses are most impacted by the changed economic environment. And as a result, we now anticipate property sales to fall by nearly 20%, which would represent a more than 25% decline from peak 2021 levels. We also expect leasing activity to be down by high single digits this year. As Bob indicated, we are maintaining our full year outlook, with core earnings per share expected to decline by low- to mid-double digits this year. Stronger growth than we originally anticipated in our resilient lines of business described earlier and incremental cost reduction efforts will largely offset the impact of our weaker outlook for capital markets and leasing transactions. However, there is more uncertainty in this outlook than there was when we first presented it in late February. We continue to expect core EPS to exceed the prior peak in 2024. And as a reminder, our outlook is informed by our view that there will be a moderate recession this year, followed by a rebound in economic activity in 2024 as the Fed reduces interest rates. With that, operator, we'll open the line for questions. Q - Chandni Luthra : Hi, good morning. Thank you for taking my questions. I would like to talk about capital allocation first. So what are the segments that are most attractive to you from an M&A standpoint? Bob, Emma, could you give us a sense of multiples and perhaps size of the deal, say, with respect to Turner & Townsend, which was one of the biggest deals you've done in recent past. And help us understand if are looking at one large transformative deal? Or is it going to be a cocktail of smaller M&A transactions. Operator: Thank you. Now our question is from Steve Sakwa with Evercore ISI. Please proceed with your question. Operator: Thank you. Our next question is from Anthony Paolone with JPMorgan. Please proceed with your question. Operator: Thank you. Our next question is from Jade Rahmani with KBW. Please proceed with your question. Operator: Our next question is from Michael Griffin with Citi. Please proceed with your question. Operator: Thank you. Our next question is from Stephen Sheldon with William Blair. Please proceed with your question. Operator: Thank you. Our next question is from Patrick O'Shaughnessy with Raymond James. Please proceed with your question. Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to Bob Sulentic for any closing comments. Bob Sulentic : Thanks, everyone, for joining us, and we look forward to talking to you again a quarter from now when we report our second quarter results. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
CBRE Group Surpasses Earnings Expectations in Q1 2024
CBRE Group, Inc. (NYSE:CBRE) Surpasses Earnings Expectations in Q1 2024
On Friday, May 3, 2024, CBRE Group, Inc. (NYSE:CBRE) reported its earnings before the market opened, revealing an earnings per share (EPS) of $0.78, which exceeded the anticipated EPS of $0.693. This performance not only surpassed the Zacks Consensus Estimate but also continued the company's streak of beating consensus EPS estimates for the fourth consecutive quarter. Despite this achievement, CBRE's revenue for the quarter ending March 2024 was slightly below expectations at $7.94 billion, missing the estimated $7.94 billion by a narrow margin. This figure, however, represents a growth from the previous year's revenue of $7.41 billion, indicating a positive trend in the company's financial health.
The detailed financial results for the first quarter of 2024 showed that CBRE experienced a revenue increase to $7.935 billion from $7.411 billion in the first quarter of the previous year, marking a 7.1% growth in USD and a 6.9% growth in local currency. This growth in revenue was accompanied by an increase in net revenue, which rose 6.3% to $4.444 billion from $4.181 billion, with a local currency growth of 6.1%. Despite these positive revenue and net revenue figures, the company faced challenges in other areas of its financial performance. The GAAP net income rose by 8.0% to $126 million, compared to $117 million in the previous year, and EPS increased by 10.4% to $0.41 from $0.37. However, core adjusted net income saw a decrease of 16.7% to $241 million from $290 million, and core EBITDA dropped by 20.3% to $424 million from $533 million, resulting in a core EPS decrease of 14.8% to $0.78 from $0.92.
CBRE also reported improvements in its cash flow, with cash flow used in operations decreasing by 34.0% to $492 million from $745 million. After accounting for capital expenditures, which increased by 12.4% to $68 million, free cash flow improved by 30.5% to negative $560 million from negative $805 million. These figures reflect the company's efforts to manage its cash flow more efficiently, despite the mixed results in other financial metrics.
The company's valuation metrics provide further insight into its financial health and investor sentiment. CBRE exhibits a price-to-earnings (P/E) ratio of approximately 26.59, indicating the amount investors are willing to pay for a dollar of earnings, which suggests a relatively high valuation by the market. The price-to-sales (P/S) ratio stands at about 0.81, reflecting the value that investors place on each dollar of the company's sales. Additionally, the enterprise value to sales (EV/Sales) ratio of roughly 0.92 shows the valuation of the company in relation to its sales, taking into account its debt and cash levels. The enterprise value to operating cash flow (EV/OCF) ratio is approximately 39.30, indicating the company's valuation in relation to its operating cash flow. These ratios, along with a debt-to-equity (D/E) ratio of about 0.56 and a current ratio of approximately 1.15, highlight the company's financial leverage and its ability to cover short-term liabilities with short-term assets.
In summary, CBRE's first-quarter earnings report for 2024 presents a mixed picture of the company's financial performance. While it has successfully exceeded earnings expectations and shown revenue growth, challenges in core adjusted net income and core EBITDA indicate areas for improvement. The company's positive outlook, as expressed by CEO Bob Sulentic, and its efficient cash flow management, however, provide a solid foundation for future growth. The valuation metrics further suggest that investors have a relatively positive view of the company's future prospects, despite the mixed financial outcomes.
CBRE Group’s Price Target Raised Ahead of Earnings
Evercore ISI analysts adjusted their price target for CBRE Group (NYSE:CBRE) to $104, up from $103, while maintaining an In Line rating. The analysts noted that ahead of CBRE's first-quarter earnings, expected towards the end of April, minor adjustments in revenue and margin forecasts have nudged the 2024 and 2025 core EPS estimates upward by about 1.5%. The price target increase reflects these changes.
While acknowledging CBRE's robust financial position and leading market share, the analysts remain cautious about the precise timing for a significant rebound in sales activity. The recommendation is to wait for a more opportune time to invest in CBRE, either in the coming months or once there's greater clarity on the interest rate landscape.
