CBRE kicked off Q1 2024 with core earnings surpassing expectations, attributed to solid net revenue growth.
Notable performance elements included strong leasing, underperformance in property sales due to high interest rates, and cost pressures, particularly in the Global Workplace Solutions (GWS) segment.
Actions are underway to address GWS cost increases, aiming for significant improvements by year-end.
CBRE maintains a core earnings per share outlook of $4.25 to $4.65 for 2024.
Financial Performance and Operations
At a consolidated level, core EBITDA met expectations, with slight outperformance in Real Estate Investments (REI) and lower-than-expected corporate costs balancing GWS margin underperformance.
Advisory Services Segment Performance (ASP) was as anticipated, with a notable onetime tax benefit.
Advisory net revenue rose 3%, with leasing revenue growth across all regions and a notable 11% decline in property sales revenue globally.
GWS segment net revenue increased by 10%, with facilities and project management net revenue up by 11% and 7%, respectively.
GWS SOP margin on net revenue declined by 90 basis points from the prior year Q1, with more than half of the decline due to unusually large medical claims.
REI segment earnings were slightly better than expected, despite subdued project sales activity. The value of the development in process portfolio increased by $3 billion.
Outlook and Strategy
CBRE anticipates generating approximately $1 billion of free cash flow in 2024 and aims to end the year with around 1 turn of net leverage.
Despite changing interest rate expectations and economic uncertainty, CBRE expects to achieve core EPS in the range of $4.25 to $4.65.
Advisory is expected to see mid-teens SOP growth, with leasing growth potentially offsetting subdued sales activities.
GWS is also projected to achieve mid-teens SOP growth, with significant improvements expected in the second half of the year as cost-cutting measures take effect.
REI now anticipates a more pronounced SOP decline due to continued higher interest rates, with outcomes heavily dependent on late-year market conditions for development project sales.
Corporate cost efficiencies are being pursued, with expectations for lower corporate costs than initially anticipated.
CBRE’s profit growth expectations for 2024 are now more heavily reliant on controllable cost components.
Question and Answer
Q1 2024 Guidance and EBITDA Outlook
Question
Does the guidance midpoint and the 70% back-half weighting imply a notable decline in Q2, and if so, is it related to EBITDA or EPS?
Answer
The midpoint of the 2024 outlook remains unchanged, with some components adjusted.
Leasing in the Advisory segment is stronger than anticipated due to a healthy economy, while sales are weaker as rate cuts are delayed.
GWS revenue growth will be back-end loaded due to large enterprise contracts onboarded in the second half, with margin expansion expected.
REI is expected to see a slight decline, with a wide range of outcomes due to the timing of development monetizations.
Q2 is expected to see a year-over-year decline due to the back-end loaded revenue growth and margin expansion in both GWS and Advisory.
EBITDA is not expected to decline sequentially from Q1 to Q2.
Full-year EBITDA margins are expected to be higher than 2023 levels.
Development Project and Fee Deals
Question
Can you provide more detail on the significant increase in the development balance, specifically regarding the nature of the large project and whether it involves fee deals?
Answer
The substantial majority of the increase is attributed to an exceptionally large industrial deal in the Sunbelt, exceeding 2 million square feet.
Capital Allocation and Stock Repurchases
Question
The company did not repurchase any stock in Q1 despite the J&J deal. Was this due to a blackout period or a deliberate decision? How should we expect stock repurchases and capital deployment in the current economic environment?
Answer
The absence of stock repurchases in Q1 was related to the J&J transaction, with a focus on strategic M&A deployment.
Share repurchases have resumed in Q2 to a limited extent and will continue for the remainder of the year, depending on M&A activity and share price attractiveness.
The J&J deal represents a significant portion of the company’s free cash flow for the year, limiting buyback activities.
Transaction Market Sentiment and Interest Rates
Question
What is the sentiment in the field regarding transactions and interest rates, and how are these factors influencing market activity?
Answer
The company’s sales and development businesses are experiencing a slowdown in activity due to a shift in interest rate expectations.
Both buyers and sellers are staying on the sidelines longer, waiting for more favorable pricing conditions.
The sentiment is different from the beginning of the year, with a more cautious approach due to the uncertainty surrounding interest rate direction.
Tax Benefit in Reported Core EPS
Question
Can you clarify the $50 million tax benefit in the reported core EPS for the quarter?
Answer
The tax benefit amounts to approximately $50 million and will not repeat.
Growth Opportunities and Investment Priorities
Question
What are the significant growth opportunities within the company, and where do you see the most potential for future growth?
Answer
Project and program management, particularly in infrastructure and natural resources, present significant growth opportunities.
The entire auction and GWS businesses are experiencing double-digit secular growth and are expected to continue expanding.
The development and investment management businesses are expected to lead growth over the next few years as they are at a cyclical low point.
The company is confident in the growth potential of all its lines of business and is actively exploring strategies to capitalize on these opportunities.
GWS Pipeline and Medical Claims
Question
Can you provide more information on the GWS pipeline mentioned and its relation to J&J contributions? Additionally, what factors contributed to the surprise in medical claims and overall cost controls?
Answer
The $900 million pipeline is consistent with the company’s previous outlook for GWS and does not include J&J contributions.
J&J is expected to contribute approximately $450 million of net revenue for the year.
The medical claims issue is primarily a seasonality and cadence-related matter due to the company switching healthcare providers over a year ago.
The impact of higher-than-expected employee medical claims has been concentrated at the gross profit line.
The company anticipates this issue to reverse in the remainder of the year.
GWS and Office Sector Rationalization
Question
Is the potential rationalization in the office sector, such as reductions in square footage, a concern for the GWS business, particularly in the office segment?
Answer
The company does not anticipate any significant downside impact from potential rationalization in the office sector.
The GWS business works with clients who view their office space as a critical asset and are focused on optimizing their portfolios.
While some clients may explore operating with less office space, they are also considering reconfiguring and upgrading their offices, which can present growth opportunities.
Industrial Leasing Activity and Outlook
Question
How is the industrial leasing sector performing, and what are the expectations for stabilization and growth in leasing activity?
Answer
The industrial leasing sector is expected to grow slightly this year and more significantly next year.
While some coastal markets exhibit choppiness, several major occupiers are actively reentering the market.
The company is optimistic about the industrial leasing sector and does not anticipate a decline in leasing activity.
Office Leasing by Asset Quality and Market
Question
Can you elaborate on the office leasing trends, specifically regarding the types of assets and markets where leasing is occurring?
Answer
Office leasing activity is primarily concentrated in higher-quality assets, with record rental rates observed in major markets like New York.
Financial institutions and business services companies are driving demand, while the tech sector, which currently lags, is expected to rebound as companies bring more employees back to the office.
Second-tier markets like Nashville are also experiencing leasing activity.
Tax Benefit Run Rate and 2025 Outlook
Question
Is the $0.61 of earnings in the quarter from the tax benefit the right run rate to consider for reaching the midpoint of the full-year guidance? Additionally, is the company still on track to achieve peak earnings growth in 2025 or come close to it?
Answer
The tax rate for the year is expected to be slightly over 19%, excluding the tax benefit, and around 22% including the benefit.
The company’s path to reaching peak earnings in 2025 remains unchanged, with continued low double-digit growth expected in resilient lines of business and strong performance in the transactional side.
Achieving record EPS next year does not require the transactional side to return to 2019 levels.
Relationship Between Rate Expectations and Investment Sales
Question
Can you discuss the relationship between rate expectations and investment sales activity, particularly in the context of the observed slowdown in March and April?
Answer
While there was an uptick in investment sales activity in the U.S. as rates increased towards the end of the quarter, this trend was not observed in EMEA and APAC.
The company notes that the impact of rate expectations on investment sales activity varies across regions.
Role of Distressed Sales in the Market
Question
Can you provide insights into the role of distressed sales in the market and whether there are any signs of thawing in this area?
Answer
There has been some activity in distressed debt sales and selling of non-distressed debt portfolios at a slight discount.
Assets that are truly distressed, such as B and C office buildings, are currently facing challenges in finding buyers at current pricing levels.
The company expects that there will be buyers for distressed assets, but pricing may need to adjust further.
Discontinued Initiatives and Cost Management in GWS
Question
Can you elaborate on the initiatives that are being discontinued and the reasons behind this decision? Additionally, how is the company addressing cost management in the GWS business?
Answer
The discontinued initiatives were not strategically important and were part of a natural process of exploring growth opportunities and adjusting priorities.
The cost issues in GWS are being actively addressed, with most corrective actions expected to be completed in the current quarter.
The company has implemented rationalization measures, including reporting some businesses to the Chief Operating Officer and eliminating a leadership layer, to improve cost management.
Further Details on GWS Cost Challenges
Question
Can you provide additional information on the cost challenges in GWS beyond medical claims, including the factors contributing to the increase and the timeline of the change?
Answer
The size of the cost challenge should be considered in the context of the overall GWS business, with the issue representing a relatively small portion of total costs.
The company has taken aggressive action to address the cost challenges and expects most corrective measures to be implemented in the current quarter.
