CBRE Group (CBRE) is the world’s largest real estate services and investment firm by revenue. The company has leading market positions within leasing, property sales, occupier outsourcing, and valuation services. CBRE Group provides its services to real estate occupiers and investors across the globe. The company works in three segments, Advisory Services, Global Workplace Solutions, and Real Estate Investments.
Since 2010 the economy has boomed, and the real estate market has thrived. But with the COVID-19 pandemic 2020 has slowed CBRE Group’s transactions down. I believe that the current valuation is fair, and there is a possibility to have a bounce back from a V-shaped economic recovery. Nonetheless, I am not an investor right now, as I would like more of a margin of safety.
Past Financial Results
Source: SEC 10-K’s
CBRE Group has had a revenue CAGR of 17.09% over the past five years. Now I should clear up where CBRE Group recognizes revenue. The company recognizes revenue in two parts, the pass-through revenue, and fee revenue. Pass-through revenue is derived from activities CBRE Group passes directly through to the client without adding value. On the other hand, fee revenue is revenue that CBRE Group has added value to the client, such as the advisory services provided. In 2019, pass-through revenue accounted for 50.36% of total revenue, and fee revenue was 49.64%. Fee revenue is what an investor will want to pay attention too as it shows what CBRE Group is doing for the customers. Overall, pass-through revenue had a CAGR of 30.95%, and fee revenue had a CAGR of 8.94%. Commercial real estate markets in the United States have seen increasing demand for space, filling vacancies, and higher rent since 2010, which is the reason for the growth in revenues. With an improving economy over the past decade and low credit costs, CBRE Group has been able to capture growth form increased institutional real estate allocation, higher occupancy, and rising rents.
Breaking down the individual business unit results shows that strong organic growth powered the top line. In 2019, total revenue was up 12%, which was fueled by a 14.5% increase in global workplace solutions, a 9.6% increase in property & project management advisory, a 6.2% increase in advisory leasing, a 7.6% increase in advisory sales, and a 12.7% increase in commercial mortgage origination. Advisory leasing and global workplace solutions are the largest revenue sources for CBRE Group (13.7% and 13.1% of fee revenues) and have seen high growth. Global workplace solutions is a star for the company, as growth in the market for outsourced real estate services has been consistently strong. The real estate investments segment also grew by 23.5% in 2019 from the Telford acquisition.
Operating and net income have followed a similar growth trend. Operating income grew at a CAGR of 8.55% over the period, while net income grew at an 18.22% clip. The result is a 2019 EPS of $3.77 per diluted share. Overall, CBRE Group has had high growth performance over the past five years due to the expanding underlying economics of the real estate markets.
2020 So Far
CBRE Group’s financial performance is reliant on a good economy and credit markets. In 2020, the COVID-19 pandemic has halted the world economy, with many countries shutting down. So, how has the CBRE Group held up?
In Q1, total revenue was up 14.7% to $5.889 billion. Of this, pass-through revenue consisted of 54.27% and increased by 18.07%. Fee revenue also increased by 10.89%. Per fee revenue source, global workplace systems increased 16.72%, advisory leasing decreased 2.49%, property & project management advisory increased 7.14%, and advisory sales increased 11.75%. CBRE Group stated that owners and occupiers put transactions on hold, decreasing leasing sales and volumes. This can bee seen in the advisory leasing segments decline year over year.
In Q2, total revenue decreased by 5.825 to $5.381 billion. Pass-through revenue made up 58.07% of revenue, but the growth slowed to 9.10%. Fee revenue for the quarter decreased by 20.83%. Per fee revenue source, global workplace solutions was down 1.18%, advisory leasing was down 37.62%, property & project management advisory decreased 4.48%, and advisory sales decreased 48.29%. Overall, the trend of putting real estate transactions on hold, lower sales, and leasing volumes persisted. As I said before, a healthy economy is a major factor in strong results at CBRE Group, and in Q2, the world economy struggled.
For the half-year, CBRE Group posted total revenue of $11.271 billion for growth of 3.88%. While pass-through revenue increased by 13.46%, fee revenue decreased by 6.23%. The largest source of fee revenue, advisory leasing, was down 22.44%. But global workplace solutions still posted growth of 7.33%. Property & project management advisory was up 1.1%, and advisory sales were down 21.12%. Altogether this resulted in an operating income decline of 25.77% and a net income decline of 35.16%. Overall, the COVID-19 pandemic drastically slowed the economy, therefore, decreasing leasing volumes, sales volumes & prices, and institutional real estate capital allocation. This lead to poor results for CBRE Group in the first half of 2020.
The Future Outlook
Source: CBRE Group Q2 Earnings Call Presentation
In the Q2 10-Q, CBRE Group stated that the expectation was COVID-19 trends would persist in the second half of there year due to virus resurgences. During Q2, leasing contracted 43% while property sales decreased 51% in the United States, according to CBRE Group. Looking at the above graphic shows that things are starting to bounce back. The percent change of confidentiality agreements has been trending in a V-shaped direction. This same trend can be seen in the YOY U.S. transaction count. What can also be seen is that confidentiality agreements were still down ~10% in June and that YOY percent change in transaction revenue has stayed depressed. I believe that the United States economy will recover slower than expected, but recent months have seen good results. It will be a matter of sustaining those results longer term to regain normalcy. I don’t think CBRE Group will be badly affected by COVID-19 in the second half as the company expected. I do expect CBRE Group to have declining comps in 2020 from 2019, but not by much, as I believe this upward trend will level off and remain within low signal digit negatives.
As of the most recent quarter, CBRE Group has a 1.23x current ratio. Looking at just cash & equivalents, restricted cash, and receivables, CBRE Group has a 0.93x quick ratio. These ratios show proper liquidity to manage the downturn in the economy. The debt-to-equity ratio is currently at 1.5x. This debt-to-equity is low and shows quality capitalization. Altogether, CBRE Group has a healthy balance sheet.
As of writing, the price per share of CBRE Group stock is around $47. In 2019, the EPS for CBRE Group was $3.77, therefore the company is trading at 12.47x 2019 EPS. But 2020 is going to be a soft year for CBRE. So far, the first two quarters have posted a total EPS of $0.75, down 34% from 2019. I’m going to be conservative and say that 2020 EPS will be down 45% from 2019, coming in at $2.07. At this EPS the stock would trade at a 22.71x. Also, the book value per share is $18.56 and the P/B is at 2.53x. Overall, I believe the company to be fairly valued.
CBRE Group has had good financial performance over the past five years. This performance is attributable to a strong economy and low-cost credit markets that have increased real estate prices and volumes. In 2020 the COVID-19 pandemic has hit the world economy hard, resulting in poor Q2 results for CBRE Group. With some recovery over the past months, there is hope that the next half of the year will show good results. With a P/E of 22.71x using conservative EPS of $2.07, I do think the company is fairly valued, but I will not be entering into a position right now as I would like a larger margin of safety.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.