CBRE Group, Inc. (CBRE) on Q1 2021 Results - Earnings Call Transcript

Operator: Greetings. Welcome to CBRE’s Q1 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. . Please note this conference is being recorded. I would now like to turn the conference over to your host, Kristyn Farahmand. Ms. Farahmand, you may begin. Kristyn Farahmand: Good morning, everyone and welcome to CBRE’s first quarter 2021 earnings conference call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks, as well as an excel file that contains additional supplemental materials. Bob Sulentic: Thanks, Kristyn, and good morning everyone. CBRE is off to a strong start in 2021. Our performance is being propelled by our long standing efforts to diversify our business across four key dimensions; property types, lines of business, geographic markets, and client types. Leah Stearns: Thanks, Bob. Turning to slide eight, segment, operating profit for advisory services was nearly flat despite a 5% net revenue decline. The revenue shortfall reflects continued pressure in high margin sales and leasing businesses, which we offset with discipline cost management, strong GSE servicing activity and elevated OMSR gains, as well as growth in the other advisory lines of business. Overall, our advisory segment operating profit margin expanded about 100 basis points compared with a year ago. Excluding the OMSR gains in both years, the margin improved 20 basis points to about 17.2%. As expected, global leasing revenue remained under pressure declining 17% due primarily to weak office leasing in the Americas. We did see modest sequential improvement in America's office leasing, as revenue fell 47% versus the 58% decline we experienced in the fourth quarter. Activity were stronger and other geographies and property types. For example, APAC leasing rose a healthy 11% as retail and industrial jumped 25% and 38%, respectively, while office was flat with a year ago. EMEA leasing grew 4% reflecting surging industrial demand, which outweighed moderate office and retail declines. Notably, China and Australia, where the pandemic remains well in check, have seen office occupancy return to pre-COVID levels, which has coincided with improving leasing trends in these markets. Advisory sales continued to improve sequentially declining just 9% versus the 16% decline in the fourth quarter. This improvement was paid by APAC or sales get just 2%, reflecting particularly robust retail and industrial activity. Americas and EMEA sales fell around 10% and 13% respectively, due primarily to sharply lower office sales. Excluding the sales and leasing business lines, net revenue rose 7% and comprise nearly half of the advisory segments Total net revenue. commercial mortgage origination revenue rose nearly 14% in the quarter, reflecting strong GSE lending including for affordable housing. This activity also reflects the benefit of continued strong refinancing and a pickup in construction activity. As a result of the strong pace of loan origination, our loan servicing portfolio increased 19% to nearly $285 billion, while servicing revenue rose over 21%. Valuation revenue was up 8%, activity was particularly strong in the Pacific region where valuation revenue increased over 35%. And finally, property management net revenue grew over 2%, primarily driven by expanded and new client relationships in APAC. This offset a modest decline in the U.S. as we exited a low margin contract and transferred a few accounts to our local facilities management business in GWS. Operator: Thank you. At this time, we will be conducting a question and answer session. . Our first question is from Anthony Paolone with JPMorgan. Please proceed with your question. Anthony Paolone: Thank you, and good morning. My first question is, I didn't catch all of Kristyn's opening comments. And I think there was some mention about flat EPS maybe year-over-year, because of some changes in the impact there. Can you touch on that again? I just want to make sure I understand the baseline and what changed? Leah Stearns: Sure. Anthony, it's Leah. Kristyn has just outline. There were some unique items in Q1 from last year, as well as this year. The key drivers are really an impairment that we had last year for GAAP EPS. And then, in the first quarter, we did have an accounting change in global investors related to our fair value accounting around our co-investment balances. We also had venture capital gains that was one time in nature in the first quarter this year. And so those items have basically offset each other. Anthony Paolone: Okay. Does the change in the valuation items in REI that you did in the first quarter. Does that change how we should think about the profits of that business just on a run rate basis? Like, does that add to the 2020, 2021 full year? Leah Stearns: It is. It was something that we expected. It was an anticipated accounting change when we came into the year that we were going to implement in Q1. And it is something that will actually reduce the volatility of that earnings stream within our investment management business going forward. We're basically going to be marketing to market our unlisted co-investment balances. And therefore, instead of having one large gain at the end of the period costs, you're going to see us mark that to market every quarter. Anthony Paolone: Okay. And so, is there a way to frame that for the full year 2021 at this point? Or you've got it fully marked as of the first quarter and it's just from here, you'll make changes? Leah Stearns: That's exactly right. From here, we'll make changes fully marked. Anthony Paolone: Okay, understand. Then same question. Last year, you outlined a lot of different cost saves. And now you change some of the presentation here. Is there a way to put that into the framework, understand where you are on that right now? What was achieved in the first quarter? And what's left to see over the remainder of the year? Leah Stearns: Absolutely. I would say in terms of how we're presenting the information. There's not a real material shift in terms of where the benefits of the cost management actions are flowing through the business. The advisory segment continues to be the area where we've made the lion share of the overall cost reduction. So that's 60% of our cost actions are benefiting advisory. Next to that is GWS, where we've got about 30%. And then the rest is between REI and our corporate segments. In terms of this first quarter though, on a net basis, I'll talk a little bit about -- we have run rate cost savings. Now we do have some temporary costs coming back like compensation that's performance based, and accrued based on that. We had about $24 million of benefit and advisory on a net basis, and about $14 million of benefit in GWS with the rest, basically, about a million or so across REI and corporate. So again, the vast majority of the overall benefit in Q1 was an advisory and our reporting segment, modifications haven't really altered the mix of where that's going to impact the business going forward. Anthony Paolone: Okay. So that's about $40 million that you achieved in the first quarter. What should we expect over the balance of the year? Leah Stearns: Yes. So in terms of for the full year, we think there will be a little over $110 million of savings. And this is all on a net basis. So when you close that up, we have taken out about just shy of $90 million in the first quarter and right around $250 million of incremental costs year-over-year on a runway basis. Anthony Paolone: Got it. Okay. And then just moving more towards the business side of things. As you will get through the strength and life sciences, data centers, industrial that stuff, can the growth in those areas, longer term offset any diminution in office? Leah Stearns: We do expect that the diversification not just across asset types, but across our geographies will also be important. So as we think about just surging demand for warehouse, industrial distribution, life sciences, as well as digital infrastructure, those are certainly helping to mitigate the acute declines that we're seeing across office. So, I do think that that is a key part of the overall story for CBRE. And the fact that we have positioned ourselves to be aligned with those very important areas of demand in the market today. And then also, given the fact that APAC was early on in terms of the impacts related to COVID, we are seeing the regions of the world that has kind of come through this and manage through COVID quite well or effectively, or we're early on the onset of COVID. Those are really back in terms of strong performance. And we're starting to see the recovery take shape in places like the U.K., Continental Europe and U.S. Anthony Paolone: Okay. And then lastly, can you just comment on the transaction environment for acquisitions, you've talked about it for several quarters, you made the industrious investment. Just wondering about the size and pipeline of potential deals over the balance of the year? Bob Sulentic: Anthony, this is Bob. We have a substantial M&A pipeline and pipeline of alternatives or investment opportunities that we would characterize more as sponsorship type opportunities where we could invest in a company and then help that company be more successful and it would be on its own. We've done a lot of strategy work to determine the areas of our business that we want to make investments in because we think they will benefit in a secular way. Leah had just outlined a bunch of that for you. So you should expect to see us make some very nice investments over the coming months, that would be secondarily favored, and CBRE would be able to help those investments perform well. I will say that we're going to be very careful. We're not going to be feeling pressure to push money out the door just because we have it. We do think that there will be opportunities. Anthony Paolone: It sounds like less on the side of operating intensive things like traditional type transactions, more of sort of the industrial style deals? Bob Sulentic: Yes. Some of both, and also some incremental investment in our real estate investment business. We do a lot in the industrial area, for instance, and we think there's incremental opportunities to invest there. Anthony Paolone: Okay. Thank you. Operator: Thank you. Our next question is from Jade Rahmani with KBW. Please proceed with your question. Jade Rahmani: Thank you very much. I was wondering if on a per share basis, there's any way to quantify what you might consider unusual items. Was it just the REI accounting change of perhaps around $0.05 per share or were there additional items? Leah Stearns: So Jade, in terms of the venture capital and the REI accounting change, those, as well as some prior period items, I would say, you got about $0.06 each related to the VC and the accounting change. And then we did have -- in the prior year period, we didn't have that impairment related to the COVID impacts across parts of our business. So that was reflected in the prior period. Jade Rahmani: And just looking at the changes to definition of net revenue, would fee revenue growth have been similar around four -- down 4.4% on a local currency basis for the first quarter? Leah Stearns: We've provided a bridge for you in terms of the overall fee to net basis. It was pretty much in line. There wasn't a major swing there. Jade Rahmani: Thanks. In terms of the GSE multifamily volumes, they've surged so far this year, up I believe over 50%. And I think you also pointed out the margin benefit from the MSR gain. Have you seen any slowdown in GSEs multifamily originations. Your rates were lower early in the year. And I think the mix of refi transactions was above the normal rate. So are you expecting the volume growth in that business to slow? Leah Stearns: Well, that's really driven, again, by market conditions. So if you look at our margin performance for the year, yes, OMSR certainly helps. But even if you back out OMSRs just before I get into the volumes on the GSEs, I think it's important to note that we actually saw margin expansion ex OMSRs. So that's really important. As it relates to the GSEs, their caps are coming down this year. So we may see some attenuation in terms of overall liquidity in that market. But again, their mandate is liquidity. So we'll see how they respond to the overall market conditions. The benefit to our business, though, is about the mix of where we're seeing that activity come from. And in the quarter, we did have more of a volume coming from Fannie as opposed to Freddie and that that certainly helps from a margin perspective, given the fact that we do have a risk share there on the Fannie side. So overall, it'll really depend, unfortunately, Jade with respect to how that that activity comes in, and we don't actually influence, that it's really a market driven outcome. Jade Rahmani: Okay. Thanks very much. I've gotten some questions on the potential Biden administration changes on the 1031 exchange, and was wondering if you've looked at either what percentage of your transaction volume is in that marketplace could be impacted? And just overall, your thoughts around how that could impact the market? Bob Sulentic: Jade, we have paid attention to that. And it is -- this is not the first time its arisen. So first of all, it's not certain that will happen. But we're watching it closely. I think we have to put in perspective, what part of our business that impacts so it impacts the sales businesses, the real estate asset sales business here in the U.S. And we think it impacts about 10% of the U.S. sales activity across markets, that's not a CBRE comment. So that's the portion of our business that might be impacted. Our view is that if it were to happen, and not be retroactive for the foreseeable future, it would be a plus for transaction volumes, because people would be in the market trying to get deals done. In the longer run, given the magnitude of it relative to our whole business and the area to which it's contained geographically and line of business wise, we think it will not have a material impact on our earnings prospects currently, or in the longer term as we've laid them out for you. Jade Rahmani: Thank you very much. And lastly, one of your peers that made an investment in a single family for rent platform. Wondering if you have any thoughts on the attractiveness of that sector and if it's something CBRE might pursue? Bob Sulentic: We're always looking for new opportunities that are kind of within the boundaries of what we do. And again, keeping in mind, we think of our business in those four dimensions that we talked about property type, line of business, client type and geography, we're scanning the horizon constantly for new opportunities. And we don't talk in advance of when we execute those new opportunities, Jade, what we might do. That's not an area that we're active in, though. Jade Rahmani: Thank you for taking the questions. Operator: Thank you. Our next question is from Rick Skidmore with Goldman Sachs. Please proceed with your question. Rick Skidmore: Good morning. Bob, you mentioned in your prepared comments about the new normal work regime and in office, you talk about what you expect that new normal to be in office based on your clients conversations. And I believe and maybe a prior call, you talked about office being at 85% versus pre-pandemic. Can you just maybe update your view there? Thank you. Bob Sulentic: Not a lot new to our view. We are intensely engaged with occupiers here in the U.S. and around the world. We believe that office will never be quite what it was prior to the pandemic. But we also believe it will be very different than it is today. The 85% that we talked about before is kind of still what we believe. By the way, if you're paying close attention to the press, and what individual companies are saying, most of the outlier comments coming in now have the flavor of, well, our people are really getting wary, and our people really need to get back together. And we really need to focus on culture. And we really need to focus on bringing new people on. So while our view hasn't changed, our conviction around the notion that it'll -- that people will get back to the office in a dramatically different way than they are today has probably grown. There will certainly be a hybrid scenario where there'll be some work from home, some work from flex space, and then of course, some work from offices. We think the configuration of offices will change, and that'll create some real opportunity for us to do work for our clients. But largely, our view is what it was 60 days ago when we reported our yearend earnings, Rick. Rick Skidmore: Great, thanks. Thanks, Bob, for that. And just to follow up. Few of the office company, and one of the data providers has talked about traffic picking up on the office side in terms of just leasing insurance. Are you seeing that in your pipeline? Or is that -- and what would be driving that? Is that people looking for expansion space? Is it just tenants just rotating space and hydrating? Any comments there? Bob Sulentic: We're certainly seeing the pickup in activity, and it's everything, it's people finally coming to grips with the fact that the vaccine is working here and these are U.S. comments. The vaccine is working. The disease is dissipating. And people are moving back toward more normal circumstances in many ways. And returning to the office is one of them. So it's pick up in every kind of thing you can imagine. And it's going to be different second half of the year than it is now. Rick Skidmore: Great. Thank you. Operator: Thank you. Our next question is from Michael Funk with Bank of America. Please proceed with your question. Michael Funk: Yes. Hi. Good morning. Thank you for the questions. Just to follow on that last one. Thinking about return to work, most clients delaying or pushing out longer term leasing decisions until after employees return to work? Or based on your conversations do they already have a sense of what they're going to need in terms of office space and are they entering into new leases? Or do we expect it to be mostly renewals for the remainder of the year? Bob Sulentic: It's a mixed bag, Michael. It depends. As some companies are aggressively out in the market, trying to execute plans now and others are waiting. And so, I wouldn't be able to characterize it as one thing across the board for these big occupiers we work with. I think the trend is more and more of them are deciding to have to address it. I will I will tell you one thing that we believe is going to happen. Better quality buildings with better infrastructure, better HVAC systems, better circulation around the building, better elevator systems, et cetera, are going to be in more demand as a result of this circumstance for very obvious reasons. And we think there is some chance that as we get later in the year and early next year, there could be real focus on those buildings and we'll pick up an activity. Michael Funk: Back to the tax question. I appreciate the comments in the 1031 exchanges. But are you seeing real time impact now from the sellers maybe accelerating the timeframe for their sales, just in anticipation of any kind of changes in tax laws. Is that affecting the sales activity? Leah Stearns: We certainly have seen that happen before, Michael. I would say, this year we are seeing activity around 1031 exchanges continue to be healthy. So it is a phenomenon that we have seen play out before. And even at the end of last year, when there was some speculation that there would be tax reform in 2021, we did see some transactions come through in the fourth quarter, and that sometimes drives some of the seasonality that we see in the fourth quarter. But it's just a small portion of that. Michael Funk: Yes. Thank you. Maybe one more if I could. Just thinking about M&A, are there specific regions of interest? You highlighted that geography diversification certainly helped? And is helping your results? Are there other regions of interest maybe where you feel that you don't have a large enough footprint or might want to get bigger that would help with that diversification? Bob Sulentic: We have across our M&A strategy. product types, we're interested in, lines of business, we're interested in, geographies we're interested in more than others, for sure, on each of those dimensions. And I wouldn't spike out anything specific, Michael, just because of the confidential nature of M&A. But I think you can be confident that again, across each of those dimensions, we have favored things we would like to get done. But we're very, very open to opportunities that aren't necessarily in the more favored areas. But we do have things retargeting. Michael Funk: Great, thank you very much. Operator: Thank you. Our final question is from Stephen Sheldon with William Blair. Please proceed with your question. Stephen Sheldon: Hi. Thanks for taking my questions. First, what do you think is driving the stronger improvement in leasing and capital market trends outside of the U.S. than within the U.S.? Is that mostly due to the different progressions with the pandemic? Or are there some other notable factors to consider? Leah Stearns: I think it really, at least what we've seen so far, it really is driven by where economies or our restrictions around mobility has been lifted and have been reopened. So for example, in China and Australia we see office occupancy is pretty much back to pre COVID pre-pandemic levels. And those are certain markets where we are seeing return in terms of demand that is corresponding with that. So I think it really is driven by the ability for businesses to get back to normal, and for transactions to really play out. And obviously, in some of those markets we're lapping or seeing comparable financial results versus really the initial downtick for those areas as well. So we are seeing nice growth come back because of that. Stephen Sheldon: Great. That's helpful. And then, Trammell Crow's expansion into Europe. I guess, what could that mean for the development business over the next few years? And how are you thinking more broadly about expanding into new countries and regions for both Trammell Crow and for Telford on the development side? Bob Sulentic: Yes. Steven, we have an extremely strong development brand and franchise. We have a lot of capital available to us from third parties that want to invest in that business. And we have a deep knowledge of where we think development opportunities will occur because of our advisory business and the feet on the street, so to speak around the world across product types. For the longest time, we were hesitant to expand outside the United States. But the success of that business grew so much in the last decade, the interest of our Capital Partners grew so much. We took the step with Telford a couple of years ago. We're extremely pleased with that. And because of that, and because of the relationships on the advisory side, and because of the demands of our Capital Partners, we decided to take this step with industrial development across Europe. And you should expect to see more of that kind of expansion over time, very thoughtful, very careful, but more of that over time. And we think we're -- it's one of those opportunities that we think we're really well positioned to take advantage of. It's an opportunity to expand our services capability. It's an opportunity to expand the footprint of things that we might invest capital into as well. Stephen Sheldon: Great. Thank you. Operator: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Bob Sulentic for closing remarks. Bob Sulentic: Thanks everyone for being with us. And we'll talk to you again at the end of the second quarter. Operator: This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation and have a great day.
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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.