CBRE Group, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Greetings, and welcome to the Q1 2024 CBRE Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Burke, Head of Investor Relations and Treasurer. Thank you. You may begin.
Good morning, everyone, and welcome to CBRE's First Quarter 2024 Earnings Conference Call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials.
Thank you, Brad, and good morning, everyone. Before I begin, it's important to note that Emma and I regularly reference our performance relative to expectations during these quarterly calls. In office, the expectations we are referencing are based on the outlook we provided during our most recent quarterly call.
leasing strength, property sales weakness and cost pressure.
Thanks, Bob. At a consolidated level, core EBITDA was in line with our expectations as slight outperformance in REI and lower-than-expected corporate costs offset margin underperformance in GWS. Advisory SOP performed as anticipated.
[Operator Instructions] Today's first question is coming from Anthony Paolone of JPMorgan.
I guess first question relates to just the guidance at your midpoint and the comments here around 70% in the back half. I guess it implicitly means that 2Q goes down notably. And so I was wondering if you could just give a little bit more color on that, whether EBITDA also goes down sequentially or if that's an EPS matter? Anything there?
So Anthony, I do want to walk through the components of our 2024 outlook again. And the headline is that we've -- our -- the midpoint of our outlook is unchanged, but I do want to opt to the components that were -- that built to that outcome. From the Advisory line, you saw our SOP growth trajectory is in line with what we talked about in February. However, the path to get there is slightly different because what we're seeing is that leasing is stronger than we had anticipated because of the health of the economy and sales is weaker as rate cuts have been pushed out.
So even sequentially, though, does EBITDA kind of move down sequentially from 1Q to 2Q? Today just seems a little bit counter to the normal seasonality.
No. EBITDA will not be declining from Q1 to Q2.
Okay. And should we think about just full year EBITDA margins still being up versus '23 at this point?
Yes. So EBITDA margin should be up across both Advisory and GWS and at the consolidated level.
Okay. And then just last one. You mentioned a large development project because you saw the roughly $3 billion balance in Developments underway. But it sounds like that's a fee deals. Just wondering if you can give us a little bit more detail because it's a big increase, and I always looked at that as being something that could drive, promote and your share of gains, but it sounds like maybe there's also like fee projects in there as well where you may not participate. Just maybe some more details there.
Yes. The significant majority of that increase is related to an extremely large industrial deal in the Sunbelt. It's over 2 million square feet.
The next question is coming from Steve Sakwa of Evercore ISI.
I just wanted to touch on capital allocation. Obviously, you had the J&J deal in the first quarter. I noticed you didn't buy back any stock. I guess, first, were you in much of a blackout period, which you didn't really -- weren't allowed to buy back stock? Or was that more of a conscious decision just based on where the stock was? And how should we be thinking about, I guess, stock repurchases going forward as well as capital deployment in the more kind of economic uncertain environment?
Steve, what you saw in Q1 was related to J&J. We've always talked about we're balancing M&A and share repurchases, and our priority is to deploy capital towards M&A and strategic M&A. And so in Q1, we pulled back on repurchases as we were executing that transaction. We have started repurchasing shares in Q2 to a small extent. And for the balance of the year, you should expect that to continue. As we do more M&A, you'll see that come through. But if we're not seeing a strong conversion of our M&A pipeline, you'll see us repurchase shares as long as our prices remaining attractive. And our goal is, on a consistent basis, to deploy at least our free cash flow on an annual basis.
Free cash flow in total?
Yes.
Okay. But I mean the J&J deal was a large chunk of probably your free cash flow for the year. So that kind of puts limited buyback activities in totality. Is that a fair way to think about it?
That is fair.
Okay. And then, I guess, Bob, just on the transaction side, it's not the biggest line item, but it probably has more to do with the sentiment around the stock and how people think about the business, even though you certainly diversified the company quite a bit and made it more resilient. I'm just curious, what are you kind of hearing from the field in terms of the transactions and just rates? And is it more about the actual Fed cut? Is it more about stability in the 10-year? I mean, I guess, is it the level of rate? Or is it more of the direction of rate and the uncertainty over that, that creates kind of the pause in the market?
Steve, first of all, there's 2 areas of our business where it really comes through in our numbers. One is our sales business, one is our development business where we sell assets and generate profits from that. At the beginning of the year, the assumption of our teams was more bullish about the trajectory of interest rates than it is now without a doubt. That shouldn't surprise anybody. I'm sure that's true across the whole market. It's also true of buyers and sellers of assets in general. And as a result, it's just slowed down activity on the sales side.
Okay. And then last, I just wanted to clarify. I think you said, I may have missed it, that there was a tax benefit in the in the reported core EPS number this quarter. But I don't know if you sort of quantified it, and I don't recall seeing a specific mention of that in the release. So could you just clarify that, please?
Correct. It's about a $50 million tax benefit in the quarter that will not repeat.
The next question is coming from Jade Rahmani at KBW.
Taking a step back. From my vantage point, the big growth opportunities would seem to be infrastructure, investment management and commercial mortgage. Could you comment if you agree with that and where you see the most potential?
Project management, in general, Jade, is a big, big growth opportunity, project and program management not limited to infrastructure. Corporates are doing a lot of work. There's work in natural resources. That's -- we see that as well into the double digits enduring grower, and it's now become a very big business for us.
Switching to GWS. The comment around the pipeline, that seems new. So I think investors are trying to [indiscernible] that how to interpret that. Could you give some color as to how much relates to J&J, which I believe was expected to add annual revenue of $825 million. And also just the regular rate double-digit growth that was expected, how much of the $900 million is new business that would be in addition to prior expectations? And then secondly, the medical claims and overall cost controls. If you could provide any color there and why that surprised management?
Yes. And Jade, on the pipeline comments, can you just give us more on what you're seeing -- or what you're hearing that's different from what we've said previous?
Well, the $900 million that was mentioned, we're trying to understand if that's accretive to prior to our prior expectations. I think in our forecast, we have about $10.2 billion of net revenue, which is [ $1.5 ] million above last year, and that in some new revenue coming in from J&J, which probably would contribute $500 million to $600 million for the year. So stripping that out, trying to compare that to the $900 million and just see how much of that is really new information versus prior.
Got it. Okay. So that $900 million is not a new information. When we provided our outlook at the beginning of the year for GWS, it was for that $900 million of -- and more of net revenue growth. That was going to come in to GWS in the back half of the year. And that's why we've been talking about the growth accelerating above trend on the revenue line in Q3 and Q4.
That's great. One last one would just be around GWS and office. I often get the question as to when the rationalization in the office sector in terms of reduction in square footage would impact that business. Do you see that as a potential headwind realizing also that there's a lot of growth opportunities, which you've commented on. But just office, in particular, would that be a potential headwind?
Yes. Jade, it's not a headwind that we haven't contemplated in our comments about expected growth for that business. And I made the comment last quarter that we don't have a single client in GWS that I'm aware of, and we work with the biggest tech companies, the biggest financial companies, et cetera, that doesn't view their office space as a critical asset for the operations of their business.
The next question is coming from Stephen Sheldon of William Blair.
And just one for me. Great to see the improvement in office leasing. So I just wanted to ask about the other major leasing sector industrial. Are you seeing things there get any better or worse? And what do you think they [indiscernible] for leasing activity to stabilize and return to growth at some point?
Well, we expect it to grow slightly this year and likely more next year. There's some choppiness in certain coastal markets. But the fact of the matter is some big occupiers are coming back into the market aggressively, some well-known companies. And we aren't of the mind that leasing for the industrial asset class is going to decline this year or next year. We feel good about it. It's not going to have the explosive growth that it had in 2021, et cetera, but it's not going to be a declining leasing business, in our view.
The next question is coming from Michael Griffin of Citi.
Great. I wanted to go back to the commentary around office leasing. I think it definitely seems positive relative to what maybe our expectations were. But -- can you unpack that in terms of where you're seeing the leasing gets done? Is it mostly on the Trophy and Class A products? Or is it spread out between the higher quality stuff and then commodity space?
A lot in the higher-quality assets, Michael. I mean we're seeing record rental rates in some of the bigger markets in the higher-quality assets in New York as an example. We're seeing financial institutions and business services companies, in particular, taking more space. Tech is way down. But for us to have this leasing picture in tech be off the way it is, we view that as good news for us because there is nobody that pays attention to tech that thinks long run. They won't, a, get more of their people back in the office; and b, grow -- be disproportionate growers relative to the rest of the economy.
Emma, you talked about, I think, the $50 million tax benefit in the quarter. Just in for this, I think it would be about $0.61 of earnings in the quarter. Is that the right run rate and cadence that we should think about to get to the midpoint of the full year guide? Or how should we think about that?
For the tax rate specifically for the year, it should be about, I think, a little over 19%. Excluding the tax benefit, it's around 22%. Does that answer your question? Or you had specific about...
Yes, yes, yes. No, that does it. And then just one last one. I noticed that you didn't provide the 2025 outlook, I think, relative to last quarter in your presentation. Is the expectation still to return to peak earnings growth in '25 or get close to it?
Yes. And our -- all of our discussion around the path to reaching peak earnings in 2025 was to provide a framework around how we're thinking about the trajectory of our business. But that path has remained unchanged, and we believe it's achievable where it sits today. And that's driven by continued low double-digit growth across our resilient lines of business at SOP level. And then on the transactional side, the SOP does not need to get back to 2019 levels for us to achieve that record level of EPS next year.
The next question is coming from Peter Abramowitz of Jefferies.
So most of my questions have been asked, but just one on the transaction markets here. Cushman mentioned on their call, it seemed to be a pretty kind of direct relationship in that investment sales for them, at least, were stronger to begin the first quarter when the rate outlook was much better. And it kind of slowed in March and April as rate expectations have gone up. So just trying to get a sense from what you see in your business in terms of the relationship between rate expectations near term and how things are happening on the ground. Just curious, your comments on kind of what you saw in the business as it directly relates from a rate perspective?
So it varies across regions in the U.S. That is what we saw later in the quarter. There was an uptick as rates increased. But in EMEA and APAC, we didn't see that trend just given that there is different dynamics going on there and EMEA is ahead of the curve in terms of their recovery in the sales market.
Got it. And then one other on the transaction market. Could you just talk generally about kind of the role of distressed sales in the market? Have you seen that kind of start to thaw at all, whether in the first quarter or going forward?
There's been some distressed debt activity, selling of distressed debt. There's also been some activity, I'd call it more pending activity of selling debt portfolios that aren't distressed just because people's concern about their debt portfolio, may sell non-distressed portfolios at a slight discount.
The next question is from Patrick O'Shaughnessy of Raymond James.
Just one question for me. In your prepared remarks, you spoke to investments in certain initiatives that you are discontinuing. Can you provide some color on what those are and to the extent that they were strategically important to you or not?
Yes, Patrick, they weren't strategically important. We may have at one time thought they were more strategically important than we do now. In fact, that's almost inevitable given that we were spending money on them and we've stopped.
The next question is coming from Anthony Paolone of JPMorgan.
I think you may have just answered this, Bob. I was just going to ask about that sort of the other half of the cost outside of medical that crept up on you in GWS, like kind of what happened there, and just how it changed so quick in like, I guess, the last few months. So I don't know if you had anything else to add on that front.
Yes, Anthony, I'll add. First of all, I really think to put it in perspective, you got to pay attention to the size of that number relative to the size of that business. Again, it's $15 million to $20 million of costs that hit the bottom line in a negative way relative to what we had expected, if you ignore the medical roughly. Is that right, Emma?
At this time, I would like to turn the floor back over to Bob Sulentic, Chairman and CEO, for closing comments.
Thanks, everyone, for being with us, and we look forward to discussing our second quarter with you in about 90 days.
Ladies and gentlemen, thank you for your participation and interest in CBRE. This concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.