CBRE Group: Servicing The Real Estate Industry (NYSE:CBRE)


Buy land, they’re not making it anymore. – Mark Twain

A key issue for investors today is how life will be different on the other side of this pandemic. Real estate, particularly office and retail, is especially in focus as investors expect work-from-home and online shopping trends accelerated shifts that would have taken years to achieve otherwise. Though noting that retail weakness could be offset by industrial real estate, e-commerce boosts the demand for warehouse space across the country.

The path forward for office real estate is less clear as select companies commit to long-term work-from-home arrangements, while others are starting to call employees back. It seems likely that some in-person work will remain an essential aspect of future work arrangements, and a move to less dense office could also help support occupancy levels.

Considering alternative ways to gain exposure to real estate, let’s look instead at a servicer. CBRE Group, Inc. (NYSE:CBRE) is a commercial real estate services and investment company.

Global Workplace Solutions (GWS)

GWS is one of CBRE’s two main segments and benefits from steady fee revenues. It provides services to tenants, including facilities management. Increased facilities management fees in the second quarter offset lower project management as the segment’s fee revenue was roughly flat year over year.

Adjusted EBITDA rose year over year on cost management actions, despite higher COVID-19-related costs. For the second quarter, GWS provided 43% of CBRE’s adjusted EBITDA. GWS’ business does have good diversification by industry as shown below.

Source: Company presentation

Advisory Services

Unfortunately, the other large segment, Advisory Services, did not fare well in the recent quarter. This segment provides services to owners such as property leasing, property sales, mortgage services, and property management. This segment comprised 50% of company adjusted EBITDA for the second quarter.

Severe contractions in leasing and property sales left adjusted EBITDA for the second quarter at only $133 million, down sharply from $334 million in the prior year’s quarter. With a strong reliance on office properties, as shown below, results in this segment will remain uncertain until broader trends emerge post-pandemic.

Source: Company presentation

Positioning for uncertainty

Given the uncertainty surrounding the operating environment, CBRE has rightly chosen to build liquidity levels. Cash and cash equivalents grew to $1.2 billion at the end of the second quarter, levels not seen in recent years, as shown below. However, the war chest results from additional borrowings under the revolving credit facility, which is only a short-term solution.

Summary

CBRE has recovered off of March lows but is still down 10% for the past year. It seems the business is more than 10% worse off than last year, as results are likely to continue to remain under pressure in the Advisory Services segment. Even though stability in the GWS provided support for second-quarter results, I see this business more at risk over the longer-term as customers have more time to adapt to new needs. I cannot think of a clear catalyst that will emerge to change the fundamental story and propel this stock back up; therefore, I’d pass for now.

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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.

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