CBRE Group, Inc. (CBRE) Earnings Call Transcript & Summary

Great. Welcome, everyone. This is Mayank Tandon. I'm the fintech analyst at Needham. I'd like to welcome Leah Stearns from CBRE. She's the Chief Financial Officer. Leah, welcome to our conference.

Thank you very much. I'm excited to join you today.

Excellent. So I'm going to kick off with a few questions, and then we'll also take a couple of questions from the participants. So Leah, first and foremost, since some of the people on the call, including myself, are relatively new to CBRE, could you give us a brief overview of the business model?

Sure. CBRE is the largest commercial real estate services company in the world. We had revenues in 2019 of nearly $24 billion, adjusted EBITDA of over $2 billion and free cash flow of nearly $1 billion. We are the market leader across leasing, property sales, real estate outsourcing, valuation, as well as property management and commercial property development in the U.S. We have the scale, size, capability set and geographic diversification that we view as really unrivaled with our presence in over 100 company -- or 100 countries globally. Our platform serves the largest owners and occupiers of real estate globally, including the largest Fortune -- largest companies in the Fortune 500. We generate significant synergies across our extensive product line offering. So as a large occupier needs us for leasing property to sell a portfolio of assets or even help them manage the build-out of their new space, we are able to bring together the value of all those segments to our clients. Our company is structured into 3 segments. So we have an Advisory Services group, which provides that transactional advisory, brokerage services, financing solutions and servicing, as well as property and project management, and finally, valuation services. Our Global Workplace Solutions segment provides outsourcing solutions to the largest global occupiers of real estate, both on an enterprise and on a local basis. And our Real Estate Investments segment really truly leverages CBRE's balance sheet as well as our internal industry knowledge and expertise to deploy capital on behalf of our -- on behalf of CBRE and through our global investors platform into real estate investments. CBRE over the last decade has really grown due to the 3 key secular tailwinds that have benefited the broader commercial real estate landscape. The first is really the overall rising ownership of real estate by institutions. And that has driven demand for commercial real estate services by large, well-capitalized, well-run companies like CBRE. The second is that occupiers of real estate are increasingly turning to outsourcing. And that's really been something that has been catalyzed by market disruption in the past when those companies looked for cost savings, that outsourcing has been something that we've been able to benefit from. And finally, commercial real estate services across our industry has seen significant consolidation. And we have really led that and brought together a true global platform, and that has continued to catalyze further growth. Within CBRE, we have, I think, uniquely positioned ourselves to capture these 3 tailwinds, and it has really helped us deliver 10 consecutive years of double-digit adjusted EPS growth. I would say, maybe something to think about CBRE in the context of COVID-19, we do expect 2020 to be impacted, as you would expect, all companies are seeing impacts. But we think that we're uniquely positioned particularly if you look at us relative to our peers. As I said, these market disruptions tend to catalyze outsourcing growth. But we also have a very strong balance sheet that we believe will allow us to emerge from those in an even stronger position. We have investment-grade credit ratings from S&P and Moody's. We have about 0.6 turns of leverage. And we have well over $3 billion of liquidity with no material maturities. And I think that just positions us to be opportunistic in the face of adversity that we're seeing happen within the real estate market today. So I think relative to the growth that we've seen historically, certainly, 2020 will be a challenging year, but we believe we'll come out of this a much stronger company.

Great. Leah, that's very helpful background. So maybe could we dive into a little bit more on the secular growth drivers for your business and how that supports your long-term financial goals? And maybe you can tie in the implications of COVID, as you mentioned, on whether that's impacting the secular growth drivers or is that just more of a cyclical issue that you'll get past once we get behind the pandemic.

Sure. Well, I'll go through each of the secular tailwinds that we've benefited from, and I'll talk specifically to COVID at the end. So first, in terms of the rising institutional ownership of commercial real estate. Institutional asset allocations to real estate have increased over 8% over the last 4 decades. And that has really driven the large, sophisticated institutions to look to having strong global partners to operate their real estate portfolios. That has catalyzed a large amount of growth within commercial real estate services versus legacy ownership, which was more individual-based or more regionally based real estate portfolios. The second is the adoption of outsourcing. As I said, typically, market disruption drives a significant amount of growth within our outsourcing business. Commercial real estate outsourcing really started in the '90s. It gained significant traction post the GFC. This company looks for a way to recognize a significant amount of cost savings within our cost structure. We typically see first-generation clients benefit from outsourcing in the range of mid-teens relative to the real estate OpEx. We believe it's a tremendous addressable market of about $130 billion, and it's growing in the high single digits annually. And that ultimately -- that landscape has really driven significant top line growth for our GWS business. We typically expect our outsourcing business to grow at about double-digit topline. And we expect that to continue to be sustainable, putting aside some of the disruption that we're seeing this year, which is really more around the operational challenge of onboarding new clients because of the limitation on mobility, which is being placed given the COVID lockdown situations that we're all dealing with. And then finally, relative to the consolidation of the commercial real estate services industry, really the emergence of the large integrated service providers, occupiers and owners of real estate truly prefer to work with the large multinational service providers that can give them consistent service globally. And that has really allowed us to capitalize on gaining market share across our key lines of business. An example of that is around our property sales business where we've actually seen market share in the U.S. grow about 1.4% over the last 5 years. And our global market share has risen nearly 4% over that period of time. And that is about a 680 basis point or so lead over our nearest competitor. So we're seeing significant traction as it relates to large owners and occupiers looking to companies like CBRE to help them manage their global real estate portfolios and really provide industry thought leadership and help guide them through making those key investment decisions. Relative to COVID, we certainly expect that to have an impact relative to near-term demand terms. We do believe long term though that there is significant strong foundational elements to the real estate story and how CBRE can play within this space. We believe that the secular demand trends that I just highlighted are in some cases accelerated by the crisis. So we think that there are potential challenges for smaller competitors that could drive further consolidation. We see that the catalyst of cost containment being something that companies will look to, and we can certainly help them through that with our outsourcing solution services. And overall, I think given our capital structure and our strong balance sheet, CBRE is uniquely positioned to be more offensive than our competitors given those -- given the strength that we have around our liquidity and free cash flow.

Got it. That's, again, very helpful. Could I just ask you also about competition? Again, not being as close to the story, I would love to hear about who the key competition is and how are you positioned versus them across these different portfolios that you highlighted earlier that make up the core of your business.

Sure. I mean from a globally integrated platform perspective, we certainly have competitors that have more or less strengths in various parts of -- or compared to our -- the various parts of our lines of business. I would say from a truly global integrated platform, our largest competitor is JLL, and they certainly have capabilities across the advisory outsourcing and investment segments of business. But we have more local competitors that in some cases may be more competitive on a local basis. The truly integrated platforms are ones that are hard to come by and hard to find. And I think that's an area where we truly stand out on a relative basis given the fact that we have the scope, scale and capabilities globally to deliver solutions on a consistent basis for both occupier and investor clients.

Excellent. And Leah, I guess -- this is a tech conference, so again, I'd be remiss if I don't ask you about tech investments, tech disruption. What's your take on the investments you need to make to ensure that you're staying ahead of your competition and meeting the needs of your clients? So if you could talk about how you go about evaluating your proptech investments, that would be very helpful.

Sure. Maybe I'll first talk a little bit about technology and innovation in the industry and then we can talk about how we make investments, because I think it's important to appreciate the perspective that we have relative to the role that technology plays in our business.

Right.

So if we take a step back and think about real estate and commercial real estate in particular, we have not seen a significant amount of disruption from technology within our industry to date. And I truly attribute that to 2 key factors. One is that real estate and commercial real estate transactions are highly complex, and that effectively leads to massive amounts of unstructured data. So to capture and create a true technological innovation that can standardize and customize things to drive efficiency is something that's quite complex to do with significant amount of unstructured data. And transactions, while there are lots of real estate transactions that happen each year, you're not seeing a high-frequency rate of transaction that you typically see in industries that have experienced significant disruption like in the travel, consumer banking or other insurance, consumer-facing industries. And so the way that CBRE looks at technology and our technology strategy is really about how do we fortify our history leadership position to ensure that we're providing our professionals and enabling our professionals to be -- we're providing them with the best technology possible to enable them to increase their productivity. Then our platform is one that attracts the best professionals, and that should ultimately increase our profitability over time and also help our growth. So if you think about that within the context of technology and how real estate can harness it, I think it's helpful to put it into context, the concept of we don't view technology as being a disruptor per se on a disruptive basis that you've seen in other industries. However, innovation is continuous within real estate. We constantly see changes with needs in terms of how asset classes are positioned within real estate and how use of space is being changed day to day. And so because that innovation is continuous, it's unlikely that you're going to see one transformational disruption, kind of one-and-done disruption to our industry. Instead, we need to keep pace and be agile and make sure that we're staying abreast of everything that's happening relative to technology and helping to drive improvements in critical workflows as opposed to trying to come out with the disruptor within the industry. And as we think about the current environment that we're operating in today, I actually think COVID and the economic disruption that's being caused by that can potentially accelerate share gains that industry leaders like CBRE can benefit from. And that's ultimately because we're able to continue to invest in technology through the cycle. We don't see this as an area where we would significantly alter our view on the importance of investing in enablement technology for our professionals. And that should help drive our platform as being an attractive platform for real estate professionals to come and want to work with. We believe that, in addition, as we continue to invest in our occupier outsourcing business to provide greater workflow solutions and technology solutions to bring that business into a more efficient state, we'll further fortify our position as the industry leader in that -- in outsourcing. And then maybe finally, just given the global scale that we have relative to the extensive data that we generate and all of that information that we capture through the relationship that we have with our clients, we truly are uniquely positioned to provide really proprietary insights to our clients so that they are really brought to CBRE. They come to CBRE with the knowledge that we're going to give them the best insight and the best intelligence to help them make the most informed decisions about their real estate strategy and how they will design their workplaces in the future. And so I think at the end of the day, we feel very confident that CBRE is uniquely positioned given the current environment of COVID to continue to invest in technology, continue to work with VC firms and proptech firms to identify partnership opportunities to really drive our position within commercial real estate to further extend our leadership position and continue to invest to attract the best human capital and to continue to drive the best results.

Right. Leah, once again, very helpful color from my perspective. But just staying on that same theme, I'd be interested to hear your thoughts on capital allocation broadly. And has your strategy shifted in the current environment due to COVID?

I think all companies are certainly, in the short term, thinking about how to prioritize investment. Given our capital structure and the position of our balance sheet, I don't view our long-term view on our capital allocation strategy as changing. It is truly founded in our view that we should continue to invest in our underlying platform, our operational capabilities and ensure that we have the best world-class commercial real estate services platform out there. We continue to assess whether or not there are opportunities to invest to enhance the services that we provide, both from a scale and a capability perspective that we can't accomplish on our own through M&A. And I think that in the current environment, there may be some opportunities relative to investing in strategic targets, but we'll just have to obviously continue to wait and see how those play out. But in addition to investing our internally generated funds into improving our platform and the connectivity of our teams, we'll continue to look at M&A. And then finally, if we are at a point where we have excess capital relative to our long-term leverage targets, we would continue to look at our share repurchase program as a further avenue to deploy capital through.

Okay. Leah, what does the balance sheet look like? I didn't get a close look at it, but maybe a snapshot of where it is today. And any efforts to maybe enhance it in the near term? Or are you comfortable with where your liquidity position is and your debt structure is?

Sure. Very comfortable with our balance sheet. So we have 0.6 turns of leverage today. Our most important covenant is 4.25x, and that's on our loan -- our revolver and our term loan. We have a very strong group of banks. Our investment-grade rating provides us access to the investment-grade bond market, loan market. And so we don't view any near-term need to access debt capital markets. We'll continue to watch and make sure that from a liquidity perspective that we continue to maintain a significant amount of liquidity. And I think that -- I know that we're placing a premium on liquidity this year and that's important to us. Our investment-grade credit ratings from both S&P and Moody's are at the high end of the BBB range, so BBB+, Baa1. And so we feel very good about where we are. We don't have any material maturities until 2023. And so we feel good that we're squarely in a position where we can continue to -- where we'll be very cautious over the next 3-plus months as everything unfolds in terms of the shape of the recovery. I feel very good that we'll be able to be opportunistic coming out of it.

Got it. Let's see, maybe shifting gears a little bit. Are there any previous investments you've made specifically related to proptech? I know you sort of touched on that, but I just want to get a little bit more color from some investors asking questions on the call regarding your proptech investments strategy. If you could just maybe rehash that, that you touched on earlier, that would be very helpful. People might have missed that.

Sure. So we do believe that investing in technology and proptech is something that will help extend the trajectory of our growth. From a leadership position, we certainly benefit from investing both within our own technology platforms but also partnering with proptech companies as well as developing our own proptech. As I said in the beginning, we are not a tech company. We look at technology to enable our professionals to be more productive and to provide world-class insight and experiences for our clients. And that's something that I think is truly a differentiation for CBRE and for our professionals within the space. So we ultimately look to partner with companies that are making technology investments that help us achieve that. And we have teams that are dedicated to assessing the landscape on an ongoing basis for proptech -- in proptech. We look at buying, we look at building and we also look at the partnering framework. And that dedicated team is constantly engaging with the landscape of proptech, VC firms, the whole ecosystem to think about how those capabilities will help further enhance that enablement platform that we're building out for our professionals. We focus on an investment thesis around ultimately what value will we create, ensuring that we have the diligence in place and ultimately the integration and execution teams behind it to ensure that the investments that we're making in technology will ultimately, from an implementation perspective, truly generate the value that we're looking to accomplish. That dedicated team that's assessing the proptech ecosystem is also focused on structuring the investment to ensure that there's strong alignment of interest between us and the outside party. And so if we are looking at partnerships, we certainly have several investments that we've made with VC firms and others that allow us to extend our capabilities in ways that we may not be able to do on our own. And sometimes, that's insight into the broader landscape of investments and some of it is getting access to technology on a proprietary basis that helps further entrench and establish that differentiated platform for our professionals.

Thank you for helping to reinforce that. I mean it's a very helpful background on the tech strategy. So Leah, you've been growing your enterprise-focused coworking solution Hana. There has been a lot of disruption in coworking recently. How does this impact Hana? Is Hana positioned differently than other coworking options in the market?

Sure. Hana is actually quite unique. It's very different from the traditional hot-desking coworking models. And so I think it's really important, the question that you just asked for folks to understand that Hana is an enterprise-focused coworking solution, with private workspaces that are built out, with enterprise-grade technology infrastructure and security in place. So it is not your typical hot-desking or coworking space from a design perspective. There are small components of it that do have those options. That the vast majority of a Hana in terms of its layout and floor plan is designed around ensuring that we're solving the enterprise needs of an occupier client. And we developed Hana after spending a significant amount of time working with occupier client with both our occupier clients as well as our investor clients trying to identify what the needs were of the largest Fortune 500 company. It was not designed around entrepreneurs or individuals. While they are an important part of the overall ecosystem that Hana does serve, it was really intended to come in and solve a challenge that we saw emerging, which was how our large occupiers going to have a flexible component to their overall real estate portfolio, and we think Hana solves that. It's also unique in that it has the CBRE balance sheet behind it. And that is important, not just from an occupier perspective, but from an investor property owner perspective because we are there to ensure that we provide continuity and that we are a partner. And over time, the objective upon it is not to just solidify our position as a manager of that space or an owner of that space, but really to be a partner with the property owner to provide them with flexible solutions as well. It's emerged as a permanent need that there are going to be existing spaces within office that need that Flex -- that occupiers need the flexibility, and it increases the attractiveness of a building to have the expansion capabilities that Flex provides. And so we are able to come in and help investor clients provide that sometimes on a white label basis or through a management agreement. We think that, over time, that model will evolve more to that model of a management fee where we can come in and provide those services for the building owner and also meet the occupier needs. We're also using a technology called Host, which was developed alongside of -- which is more of I guess what I would consider to be a virtual commercial real estate concierge platform. It connects a number of proptech companies that we work with. And it's particularly well suited given the current COVID situation that we're all dealing with. It's allowing our clients that are using Host to communicate with their employees on a virtual basis and provide them with resources that otherwise they may not have access to. So it's -- there's a way to bring together both the coworking as well as the virtual concierge platform. And it's a way that technology is really helping our occupier clients manage the uncertainty that's been created around COVID.

That's all good. Very helpful color on that element of the business. So I was going to also ask you, as the largest commercial real estate firm globally, CBRE has a massive amount of data. What is your strategy around monetizing that massive amount of data that you have?

Yes. I mean in many ways, we already monetize it, maybe not in the sense that some people traditionally think about it, but we place a premium on the proprietary nature of the data that we have. And as I said earlier, it is highly unstructured. And so we look to it to inform our view across commercial real estate that we then can provide to our clients. And that allows us to deliver truly differentiated insight from a real estate perspective to our clients, from an outsourcing perspective, to our brokers to use with our occupier and investor clients. And I think that's something that is quite different from the way, I think, investors sometimes think about how a company would monetize data. Our strategy is also very focused on the client confidentiality that's around it. And so we are able to aggregate the data and leverage that in a consistent way. But we aren't necessarily going out and per se selling it in the traditional sense.

Right. Okay. And I'm going to go back to a tech topic again. You spent a significant amount of your career at American Tower. Reading your background. During which time, you must have spent a lot of time thinking about technology and the proliferation of IoT. How does this inform your thought process on the potential for IoT adoption within CRE?

Yes. I mean CBRE is a tech-oriented company and was one focused on technology well before I arrived. But I do think my past experience in telecom infrastructure gives me a unique perspective and appreciation for how really ultimately the proliferation of digital solutions can help efficiency and the overall experience within real estate. In fact, it was part of the attraction for me because sitting in my seat at American Tower, I saw how fragmented the commercial real estate world was relative to how you could make a large impact relative to IoT use. And the companies that can really help drive that are CBRE and the other large property management on occupier outsourcing companies. Those of us that work with large owners of real estate, we can help them navigate the emerging trends in IoT and AI to help them identify when it's the right time to make those investments and help them discuss or evaluate the capital commitments that are going to have to go into that because there is a fairly significant CapEx cycle that will be required in order to bring many legacy buildings up to future IoT-proof world. And so I think it's exciting to think about the role that we can play from an advisory perspective to offer unique solutions to our clients, both on the occupier and on the investor side. And it also ties into part of our purposes of corporation and the importance around sustainability. We manage the largest portfolio of commercial real estate in the world. And so from our perspective, we sit in a very unique position to be able to drive that in terms of a priority. And we really want to make sure that as we look at IoT and technology trends like remote maintenance and temperature controls and the like, that we're able to continue to drive that thought leadership across the industry and help our clients find the right time to make those investment decisions.

Got it. Again, helpful background on the tech side. And Leah, putting your CFO hat on, I wanted to get a sense of what does the financial model look like over time? Maybe I don't know, if you want to think about it in terms of steady state, long term, if you've given any kind of long-term guidance on the model in terms of top line, margins, earnings. You mentioned earlier that you've delivered -- the company has 10 years of consistent double-digit earnings growth. So maybe if you could talk about the model going forward longer term, that would be very helpful.

Sure. I can't speak to financial targets where we withdrew our guidance. But what I tend to say is if you take a step back and look at our advisory platform, our most profitable lines of business are Advisory Services on the leasing side as well as our debt and structured finance capabilities in our loan servicing business. We believe that real estate is going to continue to be a key asset for investors globally and occupiers will continue to look at how they evolve their needs from an overall real estate perspective. We are key to that -- those decisions. And in fact, change is a catalyst for us. It helps us further entrench and demonstrate our value proposition with both the occupier and the investor clients. So I believe the advisory business will continue to benefit from this evolving real estate need and we are going to be central to those discussions. And that will lead to the opportunities from a transaction perspective, from a property management perspective, from a project management perspective and so forth. On the occupier outsourcing side, we believe that business structurally over the long term should grow double-digit at the top line. And we believe that we can drive margin expansion within that business as well. So we continue to look at ways, and technology plays a meaningful role in how we drive efficiency in that business. Our outsourcing business will continue to be a key component of our growth long term. And then finally, I think about our real estate investors business as really our option on the upside relative to our real estate. And we take the unique combination of our industry expertise and knowledge and our strong balance sheet. Put that together, we can provide a very compelling opportunity from a capital deployment perspective both on our behalf as well as on our clients we have. We co-invest alongside of our clients on the asset management side. So we are very excited about the upside that, that can generate. We've been very disciplined in building out the pipeline in our development business. We believe that we can expand that both in terms of asset classes. We're the largest industrial property developer in the U.S. We can take that to other parts of the world where industrial and logistics is a key component of growth and will continue to be. So I think long term, given the fact that we have a very diversified mix of businesses, we have a global presence and we're really benefiting from 3 key secular growth tailwinds that don't structurally change in the face of COVID, take all that in combination with our capital structure and balance sheet, we feel very good about where we are. And we are just staying very close to the evolving landscape as it relates to COVID, and that's an area where we're very focused. We're staying close to industry trends, CBRE trends, but also the broader macro environment as well as the disease trajectory and the containment efforts around it. So as we gain greater conviction around the shape of the curve in terms of recovery, we will look to execute on our longer-term strategy of growth.

Okay. And then just to close out, Leah, what is the biggest misunderstanding about CBRE among investors in your mind?

I think everyone thinks that CBRE is an office leasing company. I think -- we still get painted with a broad brush around transactions. And I think it gets missed, the tremendous efforts that has been put forth by the management team around building out our global capabilities, our highly differentiated offerings, and ultimately, the value that's created by bringing all of these together, there's tremendous synergy across our lines of business. And I think that's something that as you take a step back and think of the complexities of the largest occupiers, Fortune 500 companies and owners of real estate, we now are truly the industry leader in terms of our size, scale, scope and breadth relative to that global platform. And it's not easy to replicate something like that. It is not easy to disintermediate something like that. And so we -- given we have that, plus our balance sheet, we think we are in a very strong position to weather the pressure that's coming in 2020 as a result of the pandemic. But also, we remain tremendously optimistic about the long-term trajectory of our business. And so we're not just that office leasing company you think about.

Right. Well, this has been very helpful. I know I learned a lot today. Hopefully, our investors also benefited from all your commentary. So once again, really appreciate your time, and thank you for attending our conference.

Great. Well, thank you for having me. I appreciate the opportunity.

Bye-bye.