CBRE Group, Inc. (NYSE:CBRE) Q1 2024 Earnings Call Transcript May 3, 2024
CBRE Group, Inc. beats earnings expectations. Reported EPS is $0.78, expectations were $0.693. CBRE Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Q1 2024 CBRE Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation [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.
Brad Burke: 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. Before we kick off today’s call, I’ll remind you that, today’s presentation contains forward-looking statements, including without limitation statements concerning our economic outlook our business plans and capital allocation strategy and our financial outlook. Forward-looking statements are predictions, projections and other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected.
For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning’s earnings release and our SEC filings. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation appendix. I’m joined on today’s call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now, please turn to Slide five, as I turn the call over to Bob.
Bob Sulentic: 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 all cases, the expectations we are referencing are based on the outlook we provided during our most recent quarterly call. We started 2024 by delivering core earnings that exceeded our expectations. This was driven in part by solid net revenue growth; however, several notable elements of our performance differed from our plan going into the year. I’ll touch on three of them; leasing strength, property sales weakness, and cost pressure. Leasing outperformed expectations, driven by office leasing growth globally, that reflects a resilient economy and companies making progress on bringing their employees back to the office.
At the same time, persistent inflation kept interest rates higher than expected, which led to underperformance in our property sales transaction activity. Our Global Workplace Solutions segment again delivered double-digit net revenue growth, even as margins fell short of expectations. Our costs in GWS have increased at an unacceptable rate and we have initiated actions to bring them quickly back into line with revenue trajectory. These actions include consolidating the management of advisory and GWS under our Chief Operating Officer, Vikram Kohli, with an explicit focus on rapidly wringing out unnecessary costs and better integrating the solutions we deliver for occupier clients. Significant progress has already been made on these efforts.
We expect GWS cost challenges to be mostly mitigated by year end, with the majority of our actions being initiated in the second quarter. As a result, this segment remains poised to achieve mid-teens SOP growth for the full year. Looking across the whole business, we remain confident that we will generate core earnings per share in the range of $4.25 to $4.65. Our confidence is underpinned by our resilient businesses’ continued strong performance, our rapid actions on costs, and the fact that advisory services remains on track to achieve its growth target for the year, despite a more uncertain economic outlook. Emma will discuss the specifics of our outlook in greater detail after reviewing our first quarter performance. Emma?
Bob Sulentic: 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. Core EPS exceeded expectations due to a onetime tax benefit. Please turn to Slide six for a review of the advisory segment. Despite an interest rate outlook that steadily worsened throughout the quarter, advisory net revenue rose 3%, consistent with expectations bolstered by its first quarter of transactional revenue growth in six quarters and growth from every line of business except property sales. Leasing revenue rose in every region and global growth exceeded our expectations. Office leasing grew by double digits globally as a resilient economy and progress on return to office plans have emboldened tenants to make occupancy decisions.
We have continued to see strong momentum in US leasing in April. Financial services companies are leading their recovery with active demand up more than 20% year-over-year, across US gateway markets, reflecting their considerable progress in bringing employees back to the office. Tech companies continue to lag with demand 50% below pre-COVID levels. Globally, property sales revenue declined 11% with weakness in the US and APAC. EMEA is showing early signs of recovery with sales up 8% year-over-year, where growth was led by the UK, where property values have made more progress towards resetting as well as Spain. We saw strong growth in our loan origination business despite continued weak property sales activity. Our growth was driven by loan origination activity and escrow income.
Loan origination fees grew 16%, primarily driven by a heavier weighting of higher margin loans sourced with debt funds. Escrow income is de minimis in a low interest rate environment, but acts as a hedge in the current economic environment. We saw this in Q1 when escrow income increased nearly threefold from Q1 2023. The remaining businesses within advisory, property management, loan servicing and valuations together, grew revenue by 5% as expected. For the full year, we expect these businesses to deliver low double-digit revenue growth, led by property management, particularly as the Brookfield office assets are onboarded, beginning in Q2. Moving to advisory SOP, I’ll call out two one-time impacts that weighed on margins in the quarter. First, we experienced elevated medical claims that should reverse later in the year and second, we trued up interest income owed to a small number of clients.
Absent these one-time costs and excluding OMSRs, margin would have improved 25 basis points versus the prior year Q1. Please turn to Slide seven as I discuss the GWS segment. Net revenue rose 10% in line with our expectations. Facilities management and project management net revenue were up 11% and 7% respectively. Project management faced a particularly difficult comparison as net revenue surged 18% in Q1 2023. We had a second consecutive quarter of very strong business wins, with a healthy balance between new clients and expansions. As of the end of Q1, we already have commitments for nearly $900 million of anticipated net revenue growth, representing the significant majority of our projected growth for the full year. Having already locked in this much of our expected growth, gives us confidence in achieving our full year revenue plan.
SOP margin on net revenue declined by 90 basis points from the prior year Q1. More than half of the decline reflects a one-time impact to gross profit margin from the same unusually large medical claims we saw on advisory. The remainder is related to two areas of higher cost. First, we’ve made investments in certain initiatives that we are discontinuing. Second, our operating expenses have crept up over time as we’ve expanded into new sectors, entered new geographies, and added redundant costs related to recent M&A. In response, we are taking a fresh look at GWS’ cost structure and are already executing substantial actions across the business. The benefit of these cost actions, as well as our elevated new business wins, will be apparent in Q3 and particularly Q4.
Please turn to Slide eight for a discussion of the real estate investment segment. This segment’s significantly lower earnings were slightly better than we had expected. As we’ve previously discussed, last year’s first quarter benefited from an unusually large gain on a development portfolio, while project sales activity remains subdued in the current higher cap rate environment. The value of our development in process portfolio increased by $3 billion to $19 billion in total due to the start of a particularly large fee development project. Investment management performance was in line with expectations and below the prior year, largely due to slightly lower AUM. Fundraising activity was up 50% compared with Q 12023. Investors are showing strong appetite for enhanced return and infrastructure strategies, although we expect fundraising to slow from the first quarter’s robust levels.
Recent fundraising is not yet reflected in AUM, which fell modestly in the quarter to $144 billion, driven by negative mark-to-market and FX movements. Before turning to our outlook, I want to briefly touch on free cash flow. Cash flow conversion has improved for the second consecutive quarter, and we are beginning to see the reversal of incentive compensation headwinds that we experienced last year, driven by record earnings in 2022. We expect to generate approximately $1 billion of free cash for this year and end the year with around one turn of net leverage. Now, please turn to our updated outlook on Slide nine. Although interest rate expectations have changed significantly and the economic outlook is more uncertain, as Bob noted, we remain confident that we’ll earn core EPS in the range of $4.25 to $4.65 this year.
Within advisory, we continue to expect mid-teens SOP growth unless economic conditions take a sharp turn for the worse. Our base case scenario envisions that the economy remains resilient and interest rate cuts are delayed. Under these conditions, faster leasing growth compensates for subdued sales activity. As Bob mentioned, we also still anticipate mid-teens SOP growth for the GWS segment. SOP growth will be very heavily weighted to the second half as recent wins are onboarded and we see the impact of our cost cutting efforts. In REI, we now expect a more pronounced SOP decline, given continued higher interest rates. However, the range of outcomes is wider than normal, with the key variable being whether the market for development project sales improves late in the year.
While REI SOP is unusually depressed right now, we expect these businesses to lead our growth, once market conditions inevitably improve. Additionally, as part of our broad based efficiency efforts, our COO, Vikram Kohli and I are taking a hard look at corporate costs and expect them to be lower for the year than initially anticipated. Assuming the midpoint of our outlook range, we expect to generate nearly 70% of full year core EPS in the second half of the year. This heavier than normal weighting reflects the expected cadence of GWS revenue and cost reductions and a slight recovery of our property sales and development businesses later in the year. Our expectations for profit growth in 2024 are now driven to a greater degree by the cost components of our business, which are within our control.
As such, we remain confident in our ability to achieve our earnings outlook under a range of reasonable economic assumptions. With that operator, we’ll open the line for questions.
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